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.TON 



PRINCIPLES GOVERNING THE 
RETIREMENT OF PUBLIC EMPLOYEES 



PUBLICATIONS OF THE 
INSTITUTE FOR GOVERNMENT RESEARCH 



STUDIES IN ADMINISTRATION 

The System of Financial Administration of Great Britain 

By W. F. Willoughby, W. W. Willoughby and S. M. Lindsay 

The Budget 

By Rene Stourm 
T. Plazinski, Translator, W. F. McCaleb, Editor 

The Canadian Budgetary System 

By H. G. Villard and W. W. Willoughby (In press) 

The Problem of a National Budget 

By W. F. Willoughby (In press) 

The System of Financial Administration of the United States 

(In preparation) 

Teachers' Pension Systems in the United States 

By Paul Studensky (In press) 

PRINCIPLES OF ADMINISTRATION 

Principles Governing the Retirement of Public Employees 
By Lewis Meriam 

Principles of Public Employment 

By A. W. Procter (In press) 

SERVICE MONOGRAPHS OF THE 
UNITED STATES GOVERNMENT 

The U. S. Geological Survey (In press) 
The Reclamation Service (In press) 
The Bureau of Mines (In preparation) 

D.APPLETON AND COMPANY 

PUBLISHERS NEW YORK 



213-B 



THE INSTITUTE FOR GOVERNMENT RESEARCH 
PRINCIPLES OF ADMINISTRATION 



PRINCIPLES GOVERNING 

THE RETIREMENT OF 

PUBLIC EMPLOYEES 



BY 

LEWIS MERIAM 




D. APPLETON AND COMPANY 

NEW YORK LONDON 

1918 







COPYRIGHT, 1918, BY 
THE INSTITUTE FOR GOVERNMENT RESEARCH 



Printed in the United States of America 



THE INSTITUTE FOR GOVERNMENT RESEARCH 
Washington, D. C. 



The Institute for Government Research is an association of 
citizens for cooperating with public officials in the scientific study of 
business methods with a view to promoting efficiency in government 
and advancing the science of administration. It aims to bring into 
existence such information and materials as will aid in the formation 
of public opinion, and will assist officials, particularly those of the 
national government, in their efforts to put the public administration 
upon a more efficient basis. 

To this end, it seeks by the thoroughgoing study and examination 
of the best administrative practice, public and private, American and 
foreign, to formulate those principles which lie at the basis of all 
sound administration, and to determine their proper adaptation to the 
specific needs of our public administration. 

The accomplishment of specific reforms the Institute recognizes to 
be the task of those who are charged with the responsibility of 
legislation and administration ; but it seeks to assist, by scientific study 
and research, in laying a solid foundation of information and experi- 
ence upon which such reforms may be successfully built. 

While some of the Institute's studies find application only in the 
form of practical cooperation with the administrative officers directly 
concerned, many are of interest to other administrators and of general 
educational value. The results of such studies, the Institute purposes 
to publish in such form as will insure for them the widest possible 
utilization. 

Officers 
Frank J. Goodnow, Robert S. Brookings, Charles P. Neill, 

Chairman Vice-Chairman Secretary 

Frederick Strauss, 

Treasurer 



Edwin A. Alderman 
Robert S. Brookings 
James F. Curtis 
R. Fulton Cutting 
Raymond B. Fosdick 
Felix Frankfurter 



Trustees 

Frank J. Goodnow 
Jerome D. Greene 
Arthur T. Hadley 
Cesar Lombardi 
A. Lawrence Lowell 
Samuel Mather 
Charles P. Neill 

Director 

W. F. Willoughby 



Charles D. Norton 
Martin A. Ryerson 
Frederick Strauss 
Theodore N. Vail 
Charles R. VanHise 
Robert S. Woodward 



INTRODUCTION 

The problem of providing for the retirement of public em- 
ployees when they are no longer able to perform the duties 
of their positions is deceptive. It has an appearance of sim- 
plicity. At any one moment, the number of employees of ad- 
vanced age in a government service is small as compared with 
the total number; and it seems but a simple matter to grant 
them suitable pensions, to be paid like salaries out of the cur- 
rent revenues of the state, and to fill their places with young 
and active successors. Frequently retirement systems have 
had their origin in just such simple provisions. 

The history of such devices is always more or less the same. 
At the outset, the payments in the form of pensions amount 
in the aggregate to only a small sum, a mere fraction of 
the total payment for salaries. Each succeeding year, how- 
ever, adds its new quota to the roll of pensioners, and al- 
though a few pensioners die, this new quota increases the 
total number. The aggregate amount of the pension payments 
therefore increases, and after a comparatively few years, the 
pension payments form a very considerable percentage of the 
total for salaries. The legislature and the public begin to 
realize that what in its beginning seemed an inexpensive 
method of providing for aged employees constitutes in fact 
a serious drain on the resources of the state. Attempts will 
then be made, especially in times of financial pressure, to 
curtail the amount of the expenditure for pension purposes. 
The reformers will encounter vested interests. Employees 
will advance the unanswerable argument that they were prom- 
ised pensions, and they will ask if the state will break its prom- 
ise to its employees and deny them what they have regarded 
as part of their compensation for services. 

vii 



INTRODUCTION 

The legislature establishing the pension system in the first 
instance will probably hear many claims for pensions advanced 
on the ground that the old employee has grown gray in the 
service and that the government owes some special consid- 
eration to the man who has given the best years of his life 
to its work. Not infrequently these arguments will be supple- 
mented by the recitation of specific cases in which faithful 
government servants have ended their days in poverty and 
distress, because of some calamity which forced them out of 
the service without any provision for their support. Moved 
by an appreciation of the deserts of some of the faithful old 
employees and by compassion for those who have suffered 
from want of any suitable provision, the legislature will adopt 
a pension system. 

Surprise is frequently manifested by legislative committees 
sitting a few years after the establishment of the system when 
they find that the employees of their day and generation re- 
fuse to regard the pensions as benevolent grants for meritori- 
ous services or for deserving cases, but insist upon consider- 
ing them as something which they have earned as of right 
and to which they are as much entitled as they are to their 
pay. "Deferred pay" may become a general expression to 
define the nature of the payments. 

Not only will the employees demand that the payments shall 
be made as of right and not as of grace, but they will also 
demand that in the event of certain contingencies, they shall 
receive allowances from the system, although it may be pointed 
out to them that such allowances are not of any special ad- 
vantage to the government or even that they are directly con- 
trary to its supposed interests. The employees will not be 
satisfied with the answer, because they will frequently hear of 
cases in which the system has resulted in hardship or injury 
to one of their number or his dependents, and they will agi- 
tate for change. 

Under a retirement system adopted without study and fore- 
thought, the government will thus ultimately be confronted 

viii 



INTRODUCTION 

with two serious problems, the maintenance of proper rela- 
tions with its employees, and the financing of so expensive a 
device as any retirement system must inevitably be. In facing 
these problems it will find its freedom of action impeded 
in almost every direction by the vested interests that have 
been created through the action of past legislatures and by 
the enormous liabilities that have been incurred. 

All these difficulties, or at least almost all, can be avoided 
by forethought. The economic, social, and administrative 
questions involved can be clearly recognized by a study of 
the experience of governments that have developed retirement 
systems by the process of evolution and have left in their 
archives records showing the operation of those processes. 
The financial questions can be clearly foreseen by the experi- 
enced actuary. Methods of applying actuarial science to these 
questions have already been carried to a high state of develop- 
ment, and the legislative body which today adopts a retire- 
ment system without fairly accurate information regarding its 
future cost is guilty of neglect of its obvious duties to the 
public. 

The object sought in preparing the present book has been 
primarily to set forth the principal economic, social, adminis- 
trative and financial questions involved in establishing a retire- 
ment system and then, in so far as possible in limited space, to 
summarize the more important arguments for and against al- 
ternative lines of action. 1 In the presentation of the argu- 

1 So far as is known this book is the first of its scope. The fol- 
lowing extracts from "A Comprehensive Plan of Insurance and 
Annuities for College Teachers," by Henry S. Prichett in Bulletin 
No. 9 of the Carnegie Foundation for the Advancement of Teaching, 
New York, 1916, p. 9, is of interest in this connection: 

"The literature dealing with these pension systems is extensive, 
but it is devoted almost exclusively either to a description of the 
systems themselves or to a consideration of the actuarial and financial 
problems that are involved. In all cases it is assumed that pensions 
are desirable and are in the interest of the class or social group for 
which they have been planned, provided the pension system adopted 
is financially sound. 

For this reason those who seek to deal with the problems of pen- 

ix 



INTRODUCTION 

merits the bias of the writer must inevitably at times become 
apparent, and occasionally a question may have been seen from 
too narrow a point of view. Clear recognition of the ques- 
tions involved has seemed, however, of far more importance 
than the attempted answer of a single student of the subject. 
Sound answers must be the product of many minds. 

No attempt has been made to outline an ideal retirement 
system. In the course of the discussion the statement is made 
that the ideal retirement system is one that is equitable as 
between the government, the employees and the public, that 
meets the special needs of the service, and is financially sound. 
Many general principles may be laid down by which an ideal 
system for a particular service may be developed, but they have 
to be applied in the light of facts regarding that particular 
service. An ideal retirement age for policemen and firemen, 
for example, would not be an ideal age for a clerk. A uni- 
form "flat" pension alike for all might be an ideal provision 
for a homogeneous service in which all enter young, serve 
about the same length of time, and progress at a practically 
uniform rate of salary advancement, but it would be anything 
but ideal as applied to a complex service. In retirement legis- 
lation, therefore, there is no one best device, though unques- 
tionably there are many which may be recognized as best for 
a particular purpose. 

In studying past experience to learn what questions are in- 
volved and what arguments are advanced under each, atten- 
tion has been given in the main to the rich material contained 



sions in a democracy like the United States gain scant help from this 
large mass of literature, for back of these actuarial and financial 
questions lie others still more fundamental which concern themselves 
with the inherent wisdom and fairness of the pension system itself. 
Such an enquirer desires to be assured that a pension system will do 
good rather than harm, and to ascertain whether the pensioning of 
a particular class or group tends to demoralize or to stimulate. Upon 
such questions this mass of pension literature throws little light. Be- 
fore one undertakes actuarial and financial computations, however, 
before he makes the assumptions upon which his pensions are to be 
predicated and frames the rules on which they are to be conferred, 
these questions must be met in one form or another." 



x 



INTRODUCTION 

in the British Parliamentary Papers. They have the manifest 
merit of being in English, but that is by no means the only 
reason for their selection. England has had long experience 
with retirement systems. Its system for civil servants was 
formally established in 1810, although informal devices were 
in use prior to that time, and since then it has been in a 
process of evolution. At each time of change careful inves- 
tigations have been made and a great mass of evidence has 
been secured, all of which has been collected and preserved 
with typical British thoroughness. Retirement systems have 
also been adopted in England in the past century for many 
other classes of public employees, and English and Scotch 
actuaries have done much in developing actuarial science as 
applied to retirement systems. The English experience is 
therefore very comprehensive. It has the further advantage 
of having been evolved under a political and social environ- 
ment more nearly like our own than would be found in other 
European countries that have had long experience with retire- 
ment systems. Undoubtedly an equally detailed study of the 
operation of the systems in other foreign countries could have 
been made with profit, but the time required was prohibitive. 
Examination of the detailed evidence that shows how a system 
actually works is manifestly a great time-consuming process; 
and much of it in a foreign tongue would have delayed the 
preparation of the manuscript without probably adding a com- 
pensating amount to its value. Much general reading regard- 
ing American and European systems has been done, but the 
great majority of the principles have been evolved from a 
study of the detailed English evidence. 

An effort has been made in so far as possible to avoid the 
use of the term "pensions." For the term "pension systems," 
"retirement systems" is substituted; and for the term "pen- 
sions," "benefits" and "allowances" are frequently used. The 
word "pension" has too many different connotations to permit 
of its use in an expository undertaking like the present. The 
main problem in preparing a book of this character is to secure 

xi 



INTRODUCTION 

clearness, and that can hardly be attained if a word like "pen- 
sions" is used, which frequently has a different meaning in 
the mind of the reader than in the mind of the writer. "Pen- 
sion" unfortunately frequently connotes a voluntary grant 
for meritorious service, and it prevents a clear conception of 
the fact that the government adopts a retirement system 
largely as a business measure and that the employees regard 
it as part of their wages. The term "retirement systems" has 
at least the merit of not awakening a whole host of precon- 
ceived ideas. 2 

The general arrangement has been to consider first the 
social, economic and administrative problems involved and 
then the financial problems. No attempt has been made to go 
into the technique of actuarial science as applied to retirement 
systems, as that is a subject for an experienced actuary. A 
general statement of conclusions is presented at the end of 
the volume. 

The writer wishes to acknowledge his indebtedness to Mr. 
George Burton Buck, Mr. Paul Studensky, Mr. Frederick L. 

2 "The word pension in the exact sense applies to a payment made 
to an individual without his cooperation. In the first edition of his 
famous Dictionary of the English Language, Dr. Johnson defined a 
pension as 'an allowance made to anyone without an equivalent. _ In 
England it is generally understood to mean pay given to a state hire- 
ling for treason to his country.' 'Pensioner' he defines as 'one who is 
supported by an allowance paid at the will of another ; a dependent.' 
These definitions were the source of no small embarrassment to the 
good doctor himself a few years later when, upon the solicitation of 
friends, George III conferred upon him an annual pension of three 
hundred pounds. After some hesitation Dr. Johnson accepted the 
pension and lived contentedly upon it to the end of his life, although 
his critics never ceased to insist that his political views had been 
warped by its acceptance. These definitions reflect, no doubt, some- 
what of the prejudice of the great scholar, but they reflect also a 
general attitude of mind long since obsolete on the continent of 
Europe, but still common in America and in England, which looks 
askance upon the acceptance of a pension, both on account of the 
implied dependence and also on account of the possible effect such 
acceptance may have upon the opinions of the beneficiary. ^ It was 
partly in view of this feeling that the pensions of the Carnegie Foun- 
dation have been denominated retiring allowances. They are, of 
course, pensions in the true sense." — "A Comprehensive Plan of 

xii 



INTRODUCTION 

Hoffman, Mr. William F. Willoughby, Dr. Samuel McCune 
Lindsay and Dr. Frederick A. Cleveland for reading the 
manuscript and for making many valuable suggestions. 

Insurance and Annuities for College Teachers," by Henry S. Pritchett 
in Bulletin No. 9 of the Carnegie Foundation for the Advancement of 
Teaching, New York, 1916, p. 5. 



Xlil 



CONTENTS 



INTRODUCTION 
Chapter I 



The Objects Sought in Establishing a Retirement System 



The three parties to the system . 
The parties enumerated 
The order of their consideration 
The objects sought by the government 
The objects enumerated 
The elimination of the superannuated 

The situation in the absence of a retirement syste 
The cost of superannuation . . 
The superannuated in responsible positions 
Choking the avenues of advancement . 
The moral effect of retaining the superannuated 
Substitutes for a retirement system suggested as devices 
for eliminating the superannuated . 

A fixed age for dismissal 

Annual dismissal of a fixed percentage of employees 

A fixed term of office 

A system of efficiency ratings .... 
Return to the "spoils" system .... 

The elimination of the disabled 

The nature of the problem 

The loss due to disability 

The improvement of the morale 

The retention of able employees now lost 

The attraction of able employees 

Improvement of staff the sole object of the government 

The objects sought by the employees 

Future entrants vs. present employees .... 
The differences between the two classes 
Unfortunate natural tendency to consider present employees 
Bad results from following natural tendency . 
Difficulty of reforming system . 
Future entrants to be considered in devising permanent system 
The point of view of future entrants . 
Basis for statements 
Compensation and not charity 
Positive advantages to the employees 

XV 



10 

10 
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ii 
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15 
16 

17 

17 
18 

19 

20 
20 
21 
21 
22 
23 



CONTENTS 



The objects sought by the public 25 

The objections to the establishment of a retirement system . 26 

No objection in behalf of government as large employer . . 26 

The objection of employees to compulsory feature 26 

The individual liberty argument 26 

Optional systems ineffective 26 

The argument for Compulsion 28 

Five objections raised by the public considered ... 28 

The objections enumerated ....... 28 

Keeping in the service employees who should be elimi- 
nated 29 

Discouraging personal thrift . . . . . -29 
Attacking problem from wrong side, since what is needed 

is general instruction in the use of money ... 31 
Creating a specially privileged class supported in old age, 
or in event of earlier disability, at the expense of the 

taxpayer 32 

Opening the door of the treasury to a pension graft . . 34 

Necessity for expert actuarial advice .... 34 

Summary 36 

Chapter II 

Analysis of the Problem of Devising an Adequate Retirement 

System 

Purpose of the chapter . . 38 

What contingencies are involved ? 39 

Shall a benefit be granted in event of the contingency? . . 41 
Upon what conditions shall a benefit be granted ? . . . .41 

The superannuation benefit 42 

The disability benefit ......... 43 

What shall be the amount of benefit and how shall it be deter- 
mined? 44 

The superannuation benefit 44 

In relation to salary 44 

Independent of salary • 44 

Directly or indirectly dependent on salary .... 45 

The salary scale 46 

Objections to salary scale 46 

Degree of relationship 47 

In relation to length of service 47 

In relation to economic need 47 

The disability benefit 48 

Disability due to ordinary causes 48 

Disability due to the performance of duty .... 49 

The withdrawal benefit 50 

Benefit in event of death in active service 50 

Ordinary causes 50 

Causes arising in performance of duty 51 

Death after retirement 51 

xvi 



CONTENTS 

PAGE 

What determines the cost of the system s , » 52 

Number of benefits and cost ■, . 52 

Conditions upon which granted and cost 53 

The amount of benefit and cost 54 

Equities between individual employees and cost . . .54 

Age at entrance, sex, occupation and cost 55 

How shall cost be divided between government and employees . 57 

Exaggeration of the importance of the issue .... 57 

Method of determining real significance 58 

The basis for division 59 

Direct contributions 59 

Indirect contributions 59 

Expenses of management 59 

Guarantee of interest 60 

Guarantee of solvency 60 

Shall the system be operated on the actuarial reserve or the 

assessment or cash disbursement basis ? 60 

Description of the two with statement of differences . . 60 

The merits of the two contrasted 62 

Are actuarial computations necessary? 62 

What is the nature of the actuarial deficit on creation of system ? 63 

What can be done if the service to be provided for is small? 63 

What are bad financial practices? 64 

How shall the system be protected from financial indiscretions of 

employees? 64 

The arrangement of the detailed discussion 65 



Chapter III 
The Contributory vs. the Non-Contributory Systems 



The nature of the question .... 

Definitions 

Benefits not necessarily affected 
Financial basis not necessarily affected . 
Cost of benefits not affected 
Unimportant economically to new employees 
Of moral or psychological importance mainly 
Contributions disclose true nature of system 
Promote intelligent management . 
Check tendency toward "pension graft" 
Contributory system more flexible . 
Four principal objections to contribution 
The objections enumerated 

Failure in the English Civil Service . 

The facts as to the English experience 
Against interests of government . 
The death benefit .... 
The benefit on resignation or dismissal 
Provision for family of dismissed employee 
Disciplinary control ..... 



67 
6 7 
67 
69 
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7 \ 

7 < 
7 $ 

7 l 
78 

78 
79 
79 
81 
81 
84 
84 

8 I 

86 

86 



xvu 



CONTENTS 

PAGI 

Against interests of employees ...... 87 

The low salary argument 87 

Objections to contributions 88 

Employees protected by contributions 89 

Expensive to administer 89 

Summary 91 



Chapter IV 

The Wholly vs. the Partly Contributory Systems 

and 
The Indirect Contributions of the Government 

Definition 92 

The merits and defects of wholly contributory systems . . 92 

The merits and defects of partly contributory systems . . 95 

The basis of division under partly contributory systems . . 96 

The half and half basis 96 

Division according to the degree of interest .... 96 

Equity as between employees 97 

Consideration of equities in division • 97 

Uniform governmental contributions 98 

Indirect contributions 99 

Expenses of management 99 

Guarantee of solvency 100 

Guarantee of interest rate 101 

Chapter V 

The Superannuation or Service Benefit 

The objects sought in establishing the benefit .... 103 

The conditions upon which granted 104 

The different types enumerated 104 

Retirement in discretion of the government .... 105 

The theory of the discretionary pension .... 105 
Discretionary pensions injurious to the government . .106 

Discretionary pensions financially uncertain .... 107 

Discretionary pensions against interests of employees . . 107 
Retirement as a right at the option of the employee . . .108 

Failure to protect the government 109 

Compulsory retirement on completion of fixed conditions . 109 

The inelasticity of fixed conditions . .... 109 
The English device of retention after compulsory age in 

exceptional cases no 

Optional retirement after fulfilling minimum conditions and 
compulsory retirement after fulfilling maximum condi- 
tions 112 

xviii 



CONTENTS 



Shall conditions be based on age alone, service alone, or age 

and service combined? 112 

Age conditions preferable . .112 

Unwarranted demands for retirement after short service . 113 

Minimum service requirements 115 

Factors involved in determining upon exact retirement age . 115 

The nature of the work 115 

The possibility of transfers from athletic to sedentary 

services and correlation of services . .. . .116 

Improvement of working conditions 118 

The cost of the benefit .118 

The desires of the employees and the value of their opinions 119 

The interests of the public 120 

The amount of the superannuation benefit 120 

Three divisions of the subject 120 

The amount of the superannuation benefit and the amount of 

salary 121 

Three different classes briefly described 121 

Benefits entirely independent of salary: 

The discretionary sum independent of salary . . . 123 

Objections to discretionary provisions .... 123 

Objections to maximum and minimum limitations . . 123 

The fixed amount independent of salary .... 125 

The fixed contribution independent of salary . . . 126 

Benefits directly dependent on salary 126 

Their natural development 126 

The salary scale required in their use 127 

The nature of the salary scale 127 

Four objections to the use of the salary scale . . . 128 

The introduction of an unstable element into the system 129 

The interference with administrative changes . . 131 
The introduction of an element of unfairness between 
classes of employees and different employees of the 

same class 131 

Three answers to argument of unfairness considered 133 

The necessity for changes in the rates of contribution 134 
The statement of Mr. William Sutton regarding the 

salary scale 135 

The terminal salary plan 137 

Two variations of terminal salary 138 

The average salary plan 139 

Benefits indirectly dependent on salary 139 

Method of operation described 139 

Give maximum financial stability 140 

Give absolute equality of return 142 

Objections to this method of providing benefits . . . 142 

Insufficiency of benefit, and 142 

Inapplicability as a provision for disability . . . 143 

Weight of these objections 144 

Elaborations suggested to overcome objections . . 144 

Elaboration of accounts 146 

xix 



CONTENTS 

PAGE 

The amount of the superannuation benefit and length of service 148 

The desirability of a relationship 148 

Defects of a system not establishing a relationship . . 148 

Two methods of establishing relationship .... 150 
Basing the amount of the benefit on the purchasing power 

of contributions 151 

Merits and defects 151 

Elaborations to overcome defects 152 

Determining the amount of benefit by an arbitrary service 

scale 153 

Merits and defects 154 

The amount of the superannuation benefit and the economic and 

social needs of the employees . . . . . . . 155 

Four classes of allowances enumerated 156 

A sum in aid of subsistence 156 

The minimum of subsistence . . . . . . . 157 

For the employee as an individual ...*.. 157 
For the employee as head of a family . . . . .158 

The necessaries of the standard of life 159 

The absence of sacrifice 159 

Changing general terms into concrete figures .... 161 

The cost of the superannuation benefit 162 

The factors determining cost 162 

Factors causing differences in cost between different em- 
ployees : 

The factors enumerated * 163 

Age at entrance . 164 

Sex ...... 166 

Differences between sexes in: 

Withdrawal rates § ■ . 166 

Mortality 167 

Superannuation retirement ...... 167 

Physiological explanation . . . • . . 167 

Psychological explanation 168 

Economic explanation ....... 168 

Occupation • 169 

Chapter VI 
The Disability Benefit 

Definition I7 1 

PART I. Ordinary Disability Not Due to the Actual Per- 
formance of Duty 

The objects sought in establishing a benefit 172 

The danger of fraud 174 

The nature of the temptation 174 

Safeguards 175 

Methods enumerated ....*... 175 

XX 



CONTENTS 



or physi 



of salary 



Medical examinations .... 
Time at which made .... 
Selection of physicians 
Diminishing attractiveness of benefits . 
Placing financial burden on employees 
Safeguards a protection to honest employees 
The conditions upon which granted 

The nature and the extent of the disability to be covered . 
Permanent disability only: leave regulations to cover tern 
porary disability .... 
Protecting sick leave from abuse 
Medical examinations 

Other devices 

Disability must disqualify for all classes of government 

work 

Disability must be due to accident or disease 
Suggested procedure for distinguishing mental 
cal disability from moral disability 
The length of service to be required . 
The problems involved 
Medical examinations on entrance . 
The amount of the disability benefit . 
Three divisions of subject .... 
The amount of the disability benefit and the amount 
The benefits independent of salary . 

The discretionary amount .... 

The fixed amount 

The fixed contribution 

The benefits directly dependent on salary . 

The salary scale 

The benefits indirectly dependent on salary 
Correlating the superannuation benefit and the 

benefit 

The nature of the problem .... 

Methods of solution 

Disability devices giving equality of return . 
The amount of the disability benefit and the length of service 
The amount of benefit and the social and economic needs of the 

employee 

Four classes considered 

The cost of the benefit 

The general factors determining cost 

The factors enumerated 

The founders' control over cost 

The mortality rate of disability pensioners .... 

The mortality rate in the active force 

The real disability rate 

Differences in cost for different classes of employees 

Age at entrance 

Sex 

Occupation 

xxi 



disability 



175 
175 
176 

177 
178 
178 
180 
180 

180 
181 
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184 
185 

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195 
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195 
196 
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199 

199 
201 
201 
201 
202 
203 
203 
204 
204 
205 
205 
206 



CONTENTS 

PAGE 

The contributory vs. the non-contributory system for disability 

insurance 206 

Distinction in applicability between disability and super- 
annuation ' 206 

Absence of right to return of full contribution for disability 

insurance on withdrawal 206 

Less danger of popular disapproval 207 

Arguments in favor of non-contributory system . . . 208 

PART II. Disability Due to the Actual Performance of Duty 



The advisability of providing a special benefit 

Relation to workmen's compensation law . 

Benefit non-contributory 

The amount of the benefit 

In relation to salary 

In relation to the extent of the disability . 

In relation to the economic need of the employee 
Correlation with other benefits .... 
No return in event of withdrawal .... 



208 
209 
211 
211 
211 
212 
213 
214 
215 



Chapter VII 

Benefits on Withdrawal from the Active Service Whether by 
Resignation or Dismissal 

The extent of the benefit advocated 216 

The distinction between resignations and dismissals . . . 217 

Four arguments against distinction ...... 217 

The arguments enumerated 217 

Difficulty of making distinction 217 

Danger of discrimination 218 

Doubtful administrative expediency 218 

Doubtful social expediency 219 

Protecting the interests of the family 220 

Resignations and dismissals not distinguished .... 221 

The desirability of the benefit 221 

To the government ......... 221 

'Tutting premium on withdrawal" not a conclusive objection 

to payment of benefit ....... 221 

Benefit encourages elimination of the inefficient . . . 221 

The real problem of the government 223 

To the employee 223 

The importance of the right to resign without forfeiture: 

To secure opportunity for self-development . . . 224 

To increase earnings . . . . . . . 224 

To escape from intolerable situations .... 225 

To the public .......... 226 

One object of the public, the prevention of destitution may 

be defeated by forfeitures on withdrawal . . . 226 

xxii 



CONTENTS 

PAGE 

The objections to the benefit 230 

The objections enumerated . 230 

Encouragement of resignations 230 

Increase of cost 230 

The amount of the benefit 231 



Chapter VIII 

A Benefit in Event of Death in the Active Service, Death Not 
Caused by the Actual Performance of Duty 



The objects sought in establishing the benefit 
By the government . 
By the employees 
By the public 
Objections to the benefit 
The objections enumerated 
Government not interested 
Cost increased . 

Employees can protect themselves by private insurance 
Voluntary insurance incomplete .... 
Voluntary assessment beneficial societies financially unsound 
Cost of private insurance in small amounts high 
System can sell insurance at cost . 
Life insurance for man without dependents an unnecessary 
expense — The Widows' and Orphans' Fund 
The differences in the interest of different employees in a 

widows' and orphans' fund ..... 
Premium variation to offset differences probably impossible 

A flexible benefit necessary 

The amount of the benefit 

Two classes of benefits described 

The return of contributions 

A special life insurance benefit 

The amount of special benefit in relation to salary 

The types described 

Amount entirely independent of salary: 

The discretionary amount 

The sum based on number of dependents 

The fixed amount 

The amount a fixed annual premium will purchase 
Amount a fixed proportion of salary .... 
Amount indirectly dependent on salary .... 

The unit system 

The amount of the special benefit in relation to length of service 

The nature of the benefit based on length of service 

Social objections to benefits based on length of service 

The amount of the special benefit in relation to the economic 

needs of the employee . 

Two important points for consideration 

xxiii 



233 
233 
234 
234 
235 
235 
235 
235 
236 
236 
238 
239 
239 

240 

240 
241 

242 

243 
243 
244 
246 
246 
246 

247 
247 
248 

249 
249 
249 
250 
250 
250 
251 

252 

252 



CONTENTS 

PAGE 

Necessity for preservation of flexibility 254 

Methods of preserving flexibility 254 

The cost of the special insurance benefit 255 

The contributory vs. the non-contributory system for special 

death benefits 256 

Special reasons why employees should bear costs . . . 256 

Optional benefits 256 

Return of contributions on withdrawal 257 

Adjustment to other benefits 257 

The term of the insurance 257 

The disabled employee 258 

Summary 259 

Chapter IX 

A Benefit in Event of Death in the Active Service, Death the 
Direct Result of the Actual Performance of Duty 

The interests of the three parties in the benefit .... 261 

The government 261 

The employees 262 

The public 263 

Correlation with systems dealing with private employments 263 

The conditions upon which granted 264 

The amount of benefit in its relation to salary .... 264 

Types to be considered 264 

The amount entirely independent of salary : 

The discretionary sum 265 

The sum based on the number and class of dependents . . 265 

The special damage basis of award 265 

Actual dependency the criterion of special damage . . 266 

Family awards vs. individual awards 267 

The fixed sum regardless of dependents .... 268 

The fixed proportion of salary 268 

Payment of cost of benefit in a single premium . . . 269 

The amount of benefit in relation to economic need of employees 269 

Benefit non-contributory 271 

Chapter X 

A Benefit in Event of Death After Retirement 

The nature of the problem 273 

Origin . 273 

Division of subject 273 

Death after superannuation retirement 274 

The interest of the parties 274 

Optional settlements ........ 274 

The settlements described 274 

Factors affecting amount of benefit 275 

Objections to optional settlements 276 

xxiv 



CONTENTS 

PAGE 

Death after disability retirement from ordinary causes . . 277 
Death after disability retirement; both disability and death due 

to the actual performance of duty 278 

Chapter XI 

The Employee Who Becomes Inefficient From Causes Other 
Than Accident, Disease or Old Age 

The problem 280 

Solutions attempted 280 

Objections to solutions 281 

Return of contributions maximum benefit 281 



Chapter XII 

A Benefit in the Event of the Abolition of Position or Re- 
organization of Office 



The problem 

The argument for a special benefit 

The English experience 

The solution by transfers 

Actuarial difficulties of special benefits 

The conclusion against a special benefit 



283 
283 
284 
286 
287 
288 



Chapter XIII 
The Present Employees 

Scope of the Chapter 289 

Differences between present employees and future entrants . 290 

The differences enumerated 290 

Differences in homogeneity 290 

Differences in economic relation to retirement system . . 291 

Differences in period of social evolution 294 

Differences in desires for benefits 295 

Differences in ability to provide benefits 296 

Differences in susceptibility to moral injury .... 299 

Necessary division of the present employees into classes . . 300 
The present employees who will be retired upon the adoption of 

the system 301 

The contingencies to be covered 301 

The superannuation benefit 302 

The cost of the benefit 302 

Division of the cost 303 

The conditions upon which granted 303 

The amount of benefit 304 

In relation to salary 304 

xxv 



CONTENTS 

PAGE 

In relation to service 306 

In relation to economic need 307 

Employees continued after adoption of system: Benefits for 

past services 3°^ 

The contingencies to be covered 308 

The superannuation benefit 308 

The cost of the benefit 308 

The division of the cost 309 

The conditions upon which granted 310 

The progressively diminishing superannuation age . . 310 

The amount of the benefit 311 

In relation to salary . . . . . . . . 311 

In relation to length of service 313 

Treatment of early entrants 313 

In relation to economic need 315 

The disability benefit 316 

The cost of the benefit 316 

The conditions upon which granted 316 

The amount of the benefit 317 

Employees continued after adoption of system: Benefits for 

future services 3*8 

The contingencies to be covered 318 

The superannuation benefit 319 

The cost and its distribution - . . 319 

The conditions upon which granted 321 

The amount of the benefit 321 

The disability benefit 322 

The benefit in event of withdrawal 322 

The benefit in event of death 322 

Summary of important points 322 



Chapter XIV 

The Actuarial Reserve Plan 

vs. 

The Assessment or Cash Disbursement Plan 

The differences between the two 325 

The two plans described 325 

Important differences 325 

In respect to the taxpayers who bear burden . , . . . 325 

In respect to burden borne by interest 326 

In respect to the proportion between salaries and benefit 

payments 3 2 ^ 

The disguised assessment or cash disbursement plan . . 326 

The history of disguised assessment schemes . . . 326 

How distinguished from real actuarial reserve systems . 327 

xxvi 



CONTENTS 

PAGE 

The merits and defects of the assessment or cash disbursement 

plans 328 

The two merits: Simple and safe 328 

The four defects . 329 

Unbusinesslike and conducive to extravagance . . . 329 

The "paper fund" method of overcoming the objection . 329 

Liability to popular misunderstanding and attack . . 330 
The argument that the cost is the same under either 

system 330 

The weight of the argument 332 

Inequitable as between successive generations of taxpayers 333 

Not adaptable 333 

The merits and defects of the actuarial reserve system . . 334 

The four merits 334 

The defects can be overcome 335 



Chapter XV 

The Establishment and Operation of a Retirement System on 
the Actuarial Reserve Basis Generally Described 



The scope of the chapter 

Question of operation on this basis independent of who 

the cost 

Requires the services of an actuary 
Planning a Retirement System . 
Representation of the parties . 
Division of employees into classes 
Referendum votes . 
Position of the actuary . 
Establishing the system . 

Work of the actuary in developing premium rates 
Four processes involved enumerated 
Determining the forces on which cost depend 
The measurement of these forces 
The rate of withdrawal 
The rate of salary change 
Development of experience rates 
Graduating rates 

The service tables 
Developing money values 
Importance of devising economical system of records 
Necessity for collecting data for each system 
Necessity for conservative assumptions 
Actuarial valuations of established funds 
The necessity for valuations . 
The nature of the work . 
The actuarial balance sheet . 
The new schedule of premiums and benefits . 
How often necessary 



pays 



338 

339 
340 
34i 
34i 
34i 
34i 
342 
343 
343 
343 
344 
345 
345 
345 
346 
347 
348 
348 
349 
349 
352 
353 
353 
353 
354 
354 
355 



XXVll 



CONTENTS 

Chapter XVI 

The Actuarial Deficit Created When a New System Promises 
Benefits to Present Employees for Past Services 

PAGE 

The origin of the deficit 356 

Effect of ignoring the deficit 356 

Methods of financing the deficit 358 

Creating a perpetuity 359 

Payment by installments 360 

Chapter XVII 
Systems too Small to be Conducted on Actuarial Reserve Basis 



Scope for law of averages required . 

Why necessary 

Number necessary .... 
Methods of Securing Numbers . 
Centralized systems .... 

Advantages of centralized systems . 

Equality of the local participants . 
Resort to private insurance organizations 

Necessity for service 

Old age annuities .... 

Death benefits 

The federated universities of England scheme 
Objections to private insurance companies 



363 
363 
3°3 
364 
364 
364 
365 
367 
3*7 
367 
368 
368 
369 



Chapter XVIII 

Certain Common Practices in Financing a Fund that are 
Objectionable 

The practices described 371 

The objections to the practices . . . . " . . . 371 
The rule 373 

Chapter XIX 

Protecting the Public from Financial Indiscretion of Retired 

Employees 



Necessity for Protection 

General provisions for protection 

Payments in annuities : Funds free from attachment 

Exception in case of resignation and dismissal . 

Exception in case of large annuities .... 

Exception in case of death benefits .... 

xxviii 



374 
374 
374 
37& 
376 
377 



CONTENTS 

PAGE 

Borrowing from the fund 378 

Without security 378 

With security 379 



Chapter XX 



Conclusions 



The scope of the chapter 

A retirement system necessary 

No model system universally applicable 
System must be applicable to future entrants 
Benefits part of compensation for future entrants 
Benefits must meet employee's needs .... 

The contingencies to be covered 

The conditions upon which benefits are to be granted . 

Benefits to be granted as rights 

The superannuation benefit 

Compulsory retirement provision necessary . 
A permissive superannuation age below the compulsory age 
Superannuation conditions to be based on age 
The exact ages to be selected 
The disability benefit 
The amount of the benefit 
Not to be discretionary 
The superannuation benefit 
In relation to salary 
In relation to length of service . 
In relation to economic need . 
The disability benefit .... 
The withdrawal benefit 

The benefit in event of death in the active service 
The benefit in event of death after retirement . 
The benefit in event of death or disability in the actual 

formance of duty 

The cost of the retirement system .... 

The aggregate cost 

The distribution of cost among individuals 
The division of cost between government and employees 
Indirect contributions by the government . 
The organization and management of the fund . 
The actuarial reserve fund preferred 

Necessary safeguards 

An actuary required 

Treatment of small services 

Indirect appropriations undesirable .... 
Protecting system from financial indiscretion of employ 

The present employees 

Six differences between present employees and future entrants 
Present employees must be specially provided for 

xxix 



per 



rees 



38i 

382 

385 
386 

387 
388 
389 
393 
393 
394 
394 
30 
396 

397 
400 
402 
402 
402 

403 
410 

415 
416 
419 
421 
423 

423 
426 
426 
428 
429 
432 
434 
434 
436 
436 
437 
439 
439 
439 
440 

445 



CONTENTS 

PAGE 

Different classes of present employees . . • . • . • 445 
Benefits in respect to past services: Employees continued in 

active service 447 

Benefits for future services of present employees . . . 44& 

The actuarial deficit on creating a system 449 



Appendix 

Bibliography 45 * 

Index 4 6 5 



PRINCIPLES GOVERNING THE 
RETIREMENT OF PUBLIC EMPLOYEES 



PRINCIPLES GOVERNING THE 
RETIREMENT OF PUBLIC EMPLOYEES 

CHAPTER I 

THE OBJECTS SOUGHT IN ESTABLISHING A 
RETIREMENT SYSTEM 

Three Parties to System. The Object Sought by the Government. 
The Elimination of the Superannuated. The Elimination of the 
Disabled. Improvement of Morale. Retention of Men Now Lost. 
Attracting Men to the Service. Improvement of Staff Sole Object 
of Government. The Objects Sought by the Employees. Future 
Entrants vs. Present Employees. Future Entrants to be Consid- 
ered in Devising Permanent System. The Point of View of Future 
Entrants. The Objects Sought by the Public. The Objections 
to the Establishment of a Retirement System. Objections of Em- 
ployees to Compulsory Features. Five Objections Raised by the 
Public. Summary. 

Three Parties to System 

Three distinct parties are concerned in considering the ques- 
tion of a retirement system for public employees, namely, the 
government, in its capacity as an employer; the employees 
themselves ; and the general public. The public is involved not 
alone as the body that supports and controls the government 
and whose servant the government is, but also as the arbiter 
of public morals and social ethics. The interests of these three 
parties in a retirement system and the objects which they seek 
through its establishment are by no means identical. The ideal 
system, if such a thing exists, is not necessarily in all respects 
perfectly satisfactory to any one party, but is the result of an 
equitable compromise among the three which will meet the 
approval of an enlightened public in its capacity of arbiter. 

i 



RETIREMENT OF PUBLIC EMPLOYEES 

The general objects and interests of these three parties must, 
therefore, be clearly understood at the outset, so that the 
myriad details involved in such a system may be viewed with 
perspective and so that a decision may be reached on that 
fundamental question, "Is a retirement system desirable?" 

The logical order for considering the interests and objects 
of the different parties would doubtless be to take up first those 
of the public and then those of the government and of its em- 
ployees, since the public is the most general and the most im- 
portant party. The order here followed, however, is to con- 
sider the government first, then the employees and finally the 
public, not at all from an unwillingness to recognize the ob- 
vious principle that the broad interests and objects of the pub- 
lic are dominant and must in the end prevail, but from a 
feeling that the subject may be more simply presented by 
following the natural or historical line of development. The 
need for a retirement system first becomes apparent to the im- 
mediate parties, the government administrators and the public 
employees, and one or the other secures the establishment of 
a system by the legislature. Sometimes the two act together. 
In the earlier days legislatures apparently regarded the ques- 
tion mainly as one of administration or of finance and gave 
little attention to its broad aspects as it involved the public. 
Systems planned by administrators not infrequently have been 
adopted with a narrow conception of wherein lay the real in- 
terests of the government and of the employees and have 
ultimately engendered friction between the two. Sometimes 
systems adopted at the instigation of the employees have been 
narrowly conceived and have been unjust alike to the govern- 
ment and the newer employees, and again friction has devel- 
oped. Issues have thus been joined between the government 
administrators, on one hand, and the employees on the other; 
and on these issues the people through their legislative agen- 
cies have been asked to pass. By considering first the objects 
of the government and then those of the employees, the nature 
of these issues develops naturally, and the position of the public 

2 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

as a whole becomes so obvious that it can be expressed in a 
few words. 

After the general objects sought by each of the three parties 
have been considered attention can be given to the specific 
objections that have been urged against retirement legislation. 

The Objects Sought by the Government 

The objects which the government seeks to attain through The obj - ects 
the establishment of a retirement system may be briefly enu- Enumerated 
merated as follows : ( i ) the elimination from its active force 
of those who have lost their efficiency because of advancing 
age or long service; (2) the elimination of those who have 
lost their efficiency in earlier life because of accident or dis- 
ease; (3) the improvement of the morale of the remainder; 
(4) the retention in the service of the best of its present em- 
ployees, many of whom in the absence of such a system resign 
to accept positions elsewhere; and (5) the attraction to the 
service of a higher grade of men. These objects, which are 
closely interrelated and may properly be included under the 
one head, the improvement of the personnel, require separate 
consideration. 

The Elimination of the Superannuated. That in the public 
service some fair and decent method of providing for the 
employee who has lost his efficiency because of advancing 
age and long service is necessary is the almost universal opin- 
ion of persons who have had experience in governmental 
administration. They have reached this opinion not so much 
from any feeling of sympathy and pity that they may have 
for the elderly, enfeebled employee, as from the desire to 
remedy the existing situation and to develop an active, capable 
force. 1 

1 For a collection of statements by American administrative offi- 
cials, see "Retirement from the Classified Civil Service of Superannu- 
ated Employees," a report by the Commission on Economy and Effi- 
ciency, Washington (1912), House Document 732, 62d Congress, 2nd 
Session, pp. 7-13, and "Savings and Annuities Plan Proposed for 

3 



RETIREMENT OF PUBLIC EMPLOYEES 

The Situa- The usual situation in the absence of an adequate retire- 

Abience^f ment system legally established is that the superannuated man 
a System is continued on the payroll so long as he can fulfill the mini- 
mum attendance requirements. Such a procedure is almost 
inevitable from the very nature of government service. No 
administrative officer has a financial interest in the business 
of his office. Any expense involved in exercising the natural 
instincts of human kindness by keeping an old man in the serv- 
ice does not fall on the administrator personally ; it is borne by 
the taxpayers and they are far removed. Their chances of 
finding out about any individual case and raising a question 
are so remote that the thought of difficulty on that score 
probably never enters the administrator's head. On the other 
hand, he generally knows that the aged employee has many 
friends and acquaintances in the office force, even if he and 
the aged employee are not bound by those ties that arise from 
long association in the public service. All know something 
of the family affairs of the man, of the plans that would have 
to be sacrificed and of the changes that would have to be made 
if dismissal should come. Sometimes everyone realizes that 
it would mean absolute want. The administrator, therefore, 
can safely assume that, if he should overcome his own inclina- 
tion to take no action, office opinion would be against him 
and he would endanger the spirit of his force. He could 
count on an attack from friends and acquaintances of the 
employee both in and out of the service, and he would be 
fortunate if he escaped political pressure and possibly news- 
paper notoriety. He knows that inefficiency is difficult to 
prove, whereas dismissal of an old man without provision can- 
not be hidden. In the vast majority of cases almost all the 

Retirement of Superannuated Civil Service Employees," by Herbert 
D. Brown, Senate Document, No. 745, 61st Congress, 3d Session, 
reprinted as Appendix A of above-mentioned report of the Economy 
Commission, pp. 14-27. See also report of Massachusetts Pension 
Commission, Massachusetts House Document 2450, Boston (1914), p. 
183; and "Report on the Organization of the Public Service of Can- 
ada," by Sir George Murray, 3 George V, Sessional Paper 57 a-1913, 
Ottawa (1912), p. 18. 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

forces at work dictate obedience to the unwritten law of per- 
manency of tenure so long as the man can be at his place for 
the minimum time required. 

An attempt has sometimes been made to determine the cost The Cost of 
of this inadequate and informal quasi-benefit system which annuat i OQ 
provides for carrying the superannuated employee on the 
active rolls so long as he is able to report for duty, but does 
nothing for him if his ability to report for duty fails. The 
procedure has been to secure reports from the responsible 
administrative officers showing what proportion of the salaries 
being paid the elderly employees is actually earned. The dif- 
ference thus found between the salaries paid and the amounts 
actually earned is properly chargeable as a loss due to such a 
system, but it by no means measures the entire cost. 2 

To measure the loss that results to a government when a 
superannuated employee is retained in a position of responsi- 
bility is beyond the province of statistics. A physician who is 
responsible for the maintenance of public health, and yet 
is so far broken that his administrative superiors are forced 
to admit that he is only earning half his salary, may occasion 
a loss that cannot be reckoned in figures. 3 Figures cannot 
measure the damage that may be done by a school teacher 
whose powers have appreciably failed. 4 Men who are the 
directing heads of large governmental undertakings may them- 
selves become superannuated. Naturally in making reports 
on impairments due to age, they do not realize that they them- 

2 The United States Commission on Economy and Efficiency made a 
very careful study on this basis. See "Retirement from the Classified 
Civil Service of Superannuated Employees," Report to the President 
on Retirement Allowances, Washington (1912), House Document 
732, 62 Congress, 2d Session, pp. 37-45. 

3 The question of superannuated public physicians was presented 
before the Committee on the Union Officers' Supperannuation (Ire- 
land) Bill. British Parliamentary papers (1882), Vol. XIII. See 
Questions 718, 719 and 903; also memorandum on p. 96. 

4 For a discussion of the effect of a retirement system on the effi- 
ciency of a school system, see "Teachers' Pension Systems in Great 
Britain," by Raymond W. Sies, U. S. Bureau of Education, Washing- 
ton (1913) Pam. 544. 

5 



RETIREMENT OF PUBLIC EMPLOYEES 



Choking 
Avenues of 
Advance- 
ment 



selves are not earning their salaries; far less do they realize 
that the losses due to their superannuation may approach and 
in some cases even exceed the total appropriation made for 
the undertaking of which their position automatically gives 
them control. The aged administrator who sticks religiously 
and obstinately to the methods which were in vogue when 
he first entered the service regardless of the great progress 
in mechanical devices and office aids in the last two decades, 
is by no means unknown to government services. Losses from 
such sources might easily make the losses as measured by 
amount of salary unearned seem insignificant. 5 

Permitting superannuated employees to occupy the more 
important positions has another bad effect, the cost of which 
cannot be determined. Even in offices where promotions are 
made in theory solely upon merit, without regard to length 
of service, length of service does, as a matter of fact, enter 
into the selections. If an administrative officer has an oppor- 
tunity to make a promotion to a vacancy, and one candidate is 
a comparatively new man of great promise who has already 
received rapid advancement and the other is a man with an 
excellent record for long and faithful though not brilliant serv- 
ice, the decision is not infrequently in favor of the older man. 
In some offices, of course, seniority alone is practically the 
determining factor. As the office grows older the attractive 
middle grade positions carrying the higher salaries and the 
larger opportunities to do things become filled with men of 
long service, of fairly advanced age, and perhaps of mediocre 
ability, who have not been drawn off by outside offers. Unless 
the office is expanding and the number of positions increasing, 
the younger men of ability, coming in at the bottom, are dis- 
couraged by the remoteness of the chances of advancement, 

B "The evil consequences of retaining a single civil servant in an 
important post for which he has become incompetent cannot be esti- 
mated in money and may be much more than an equivalent for the 
expense of the superannuation of a whole department." Report of 
the Commissioners on the Operation of the Superannuation Act, p. 
XI, British Parliamentary papers, London (1857), Vol. XXIV. 

6 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

and resign as soon as opportunity offers. In some offices this 
process may be carried so far that when vacancies occur near 
the top no properly qualified experienced men are available 
to take them and they go more or less by default to older 
men of mediocre ability who have secured advancement to the 
middle grade positions largely on the basis of faithful service 
and seniority. If the duties of the office are mere matters 
of routine administration, the resulting loss may be scarcely 
appreciable, provided the force was well organized at the out- 
set; but if the value of the services performed is largely, if 
not entirely, dependent on the initiative and force of the lead- 
ing officials, this system of permitting the avenues of advance- 
ment to become choked with elderly men who, although en- 
tirely worthy, have not the capacity for leadership, represents 
a loss that may be equivalent to almost complete atrophy. 6 

The failure of the public service to attract and hold the more 
ambitious and energetic men is a loss which is to some degree 
attributable to the absence of an adequate retirement system. 
Though this loss is perhaps mainly due to the disparity be- 
tween the financial rewards offered in public as contrasted with 
private service and the practice of reserving many of the 
higher positions as political plums for the deserving, yet it is 
also due in part to the remoteness of the prospects which a 
new entrant has of reaching the higher positions, which give 
a kind of reward — not found in most private service — that 
in some foreign countries has been more than sufficient to 
offset differences in pecuniary gain. By retiring the aged 
employees, the chances of promotion are, of course, enor- 
mously increased, for the employees of advanced age are gen- 
erally fairly high up and a single resignation at the top fre- 
quently means advancement all down the line. A good pros- 
pect of advancement is, of course, in many cases more potent 

9 See Report of the Secretary of Commerce and Labor for 1912, 
Washington (1913), p. 37, quoted in the 29th Report of the United 
States Civil Service Commission, Washington (1913), p. 204, for an 
instance of such a situation. 



RETIREMENT OF PUBLIC EMPLOYEES 



The Moral 
Effect of 
Retaining 
the Super- 
annuated 



in attracting and retaining men than the immediate salary; 
and, in the absence of a retirement s) T stem, the prospects of 
advancement in the public service are frequently summarized, 
somewhat inaccurately, in the familiar governmental proverb, 
"Few die and none resign" — inaccurately because resignations 
among comparatively new entrants, discouraged by their pros- 
pects, are all too common. 7 

The effect of the retention of a superannuated employee on 
the morale of a force is a difficult thing to gauge. If the 
employee occupies a routine position, his fellow employees 
may close ranks about him and carry his load for him in such 
a way that the public in reality suffers little loss. At the other 
extreme are the cases where the superannuated man is in a 
position requiring leadership. Employees cannot work effec- 
tively if they generally believe that a modern device or a new 
method would do what they are doing in a fraction of the 
time, nor can they be enthusiastic if they believe that their 
official leader is far behind the progress of evolution in his 
field. "With confidence in the usefulness and economy of their 
work gone, employees easily fall into what has been termed 
the "government stroke." 8 Between these two extremes of 
the superannuated man in a subordinate position and the 

7 "Young men now entering the service with little assurance for 
their future look rather to acquiring some outside profession or 
business, and they do not have the same motives of devotion to good 
service that govern in outside employment. They may lose their 
salary at a time of life when the avenues of outside employment 
may be closed to them, no matter how long or faithfully they may 
have labored in the public services. They are thus on the alert for 
other employment which will enable them to better their future condi- 
tion. Few of the young men now entering the service do so with a 
definite intention of remaining in it permanently or of making it a 
career. It is accepted as a make-shift while preparing for a profes- 
sion or looking for other employment." — 20th Report, United States 
Civil Service Commission, Washington (1904), p. 155. 

s Superannuation is not, of course, the sole cause of "government 
stroke" where it develops; other factors such as a distinctly political 
administration of an office or political interference in administration 
or favoritism are at times direct causes. In order to get efficient 
work the general belief in the office must be that the merit system is 
a reality and not a sham. 

8 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

superannuated man in a responsible position are innumerable 
degrees of difference, but in most cases a considerable element 
of loss to the public is involved. 

Stagnation in promotions has, of course, an effect on the 
morale of the force, and, in so far as the absence of a retire- 
ment system for superannuated employees causes stagnation, 
it operates against effectiveness. 

To overemphasize the importance of preserving the morale 
of a public force is almost impossible. In a private commer- 
cial enterprise where the power of appointment and removal 
can be safely vested in a responsible head whose efficiency 
can be measured by concrete results, the employees can, by a 
certain type of pressure, be kept up to a given standard; but 
in a government service, where the power of appointment and 
dismissal has to be restricted and where the motives that lead 
administrators to exert that type of pressure are largely lack- 
ing, high standards are to be maintained more through hope 
of advancement than through compulsion. In many branches 
of governmental work, especially those involving the exercise 
of professional qualifications, the mere suggestion of compul- 
sion is ridiculous. The public service must be so organized 
that it appeals directly to those motives that lead individual 
men to work without driving. 9 

8 "To be conducted successfully, its [the Government's] rewards 
must appeal to the motives which compel able men to put forth their 
best effort. The opportunity for a stable career and the assurance 
of a pecuniary return which will meet the demands of a reasonable 
standard of living in view of the position held and the service ren- 
dered and will remove the fear of dependency upon others when 
advancing years have diminished, or it may be, altogether destroyed, 
the capacity for work, are the inducements which our great business 
corporations have been finding it more and more necessary to hold 
out, if they wish to attain large success. The government must offer 
the same inducements if it would secure the same grade of service. 

"That such inducements are not now offered by the government is 
sufficiently well known. The unambitious, the timid, the mediocre, 
once in the government's employ are reasonably sure to remain until 
forced out ; but it is increasingly difficult to retain in the government's 
administrative services competent men of initiative and force. Mean- 
while, the demand for the undertaking by the government of new 



RETIREMENT OF PUBLIC EMPLOYEES 



Suggested 
Substitutes 
for Super- 
annuation 
Retirement 
System 



A Fixed Age 
of Dismissal 



Annual 
Dismissal 
of a Fixed 
Percentage 
of Em- 
ployees 



Numerous substitutes for a superannuation retirement sys- 
tem have been suggested from time to time by some who have 
recognized that the practice of retaining aged employees in 
the active service after their powers have begun to fail results 
in a large but immeasurable waste. Among these may be men- 
tioned (i) requiring all to retire at a fixed age without any 
retirement allowance; (2) requiring the dismissal each year 
of a certain percentage of the employees; (3) establishing 
fixed terms of office with or without the privilege of reappoint- 
ment; (4) establishing an adequate system of efficiency ratings 
and requiring all to be dismissed who fall below a given stand- 
ard and (5) abolishing the merit system. That each of these 
proposed remedies has great defects is apparent on brief con- 
sideration. 10 

If all the employees above a 'certain age in any federal, state, 
county, or municipal government should suddenly be required 
to resign without regard to their efficiency, two things might 
reasonably be expected to happen. First, the remaining em- 
ployees who could secure other positions outside the service 
would do so and those who could not would be thoroughly 
dissatisfied. Second, the public sense of decency and fitness 
would be outraged. To meet a popular demand, roused by 
the appeal made by certain individual cases, reinstatements 
would be made wholesale or else the legislative body would 
adopt some hasty, ill-considered pension legislation. 

The complete demoralization that would result from a pro- 
vision for the dismissal of a certain percentage of employees 

administrative tasks is constantly more insistent and there is a never- 
ceasing growth of its administrative departments already established. 
There is a supreme need of organizing the civil service of the govern- 
ment upon a sound and lasting business basis, if it is to meet ade- 
quately not merely the needs of the present, but the still greater future 
needs which even now can be plainly foreseen." — "Civil Pensions for 
Federal Employees," National Civil Service Reform Association, New 
York, 1909, p. 5. 

10 Nineteenth Report of the United States Civil Service Commis- 
sion, Washington (1903), p. 26, and "Superannuation in the Civil 
Service." — Report of a special committee of the National Civil Serv- 
ice Reform League, New York ( ?), 1901, p. 5. 

IO 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

each year can scarcely be imagined. Many employees would 
spend more time in seeing that their names were not on the 
list to go than they would in doing their work. Administrative 
officers would devote their days to dealing with those forces 
which are generally grouped under the term "influence." In- 
dependent, self-respecting men would leave the service for 
positions in private life where no such conditions are imposed, 
and the class of persons willing to accept government employ- 
ment would be distinctly inferior. 

Even worse is the suggestion of a fixed term of office with a Fixed 
or without the privilege of reappointment. No business man ^ r ™ of 
would for a moment consider limiting each employee to a fixed 
term. Stability of the force, with minimum costs for training 
new men and maximum development of that judgment which 
comes from long experience in the work is what large cor- 
porations seek, especially in those departments of their under- 
takings which most resemble public service. If the privilege 
of reappointment were granted, it would be necessary to throw 
even greater weight on not altogether satisfactory civil service 
examinations or to revert practically to the spoils system. 
That the highest type of men now secured for the public serv- 
ice would compete for positions on such terms is scarcely 
imaginable; the permanency of tenure and the general condi- 
tions of the service are the forces which enable the public to 
secure such men at salaries that are frequently considerably 
lower than those paid for similar services in private enter- 
prises. A fixed term of service would in all probability result 
in an immediate deterioration of the force. 

An adequate system of efficiency ratings with compulsory a System 
retirement for those who fall below a given standard is an ° f Efficiency 

° Rating 

excellent provision, theoretically. To anyone who has hon- 
estly struggled with the problem of adequate efficiency ratings 
in the public service, its impracticability is apparent. Though 
such ratings honestly made are of great administrative assist- 
ance and should be developed to a far greater extent than at 
present, they could scarcely meet the strain that it is suggested 

II 



RETIREMENT OF PUBLIC EMPLOYEES 

to put upon them. They depend fundamentally on the judg- 
ment of the administrative officer who makes the report, for 
in few cases can he determine accurately the quantity and qual- 
ity of an employee's work. A retirement system based on 
efficiency ratings would be adopted on the assumption that an 
administrator who will not take the initiative in recommending 
a dismissal will place on an efficiency report a judgment rating 
which means dismissal. It is an unwarranted assumption, be- 
cause the new system makes no change in the fundamental 
forces that are in operation, but merely a change in the form. 
Perhaps an administrator would occasionally be found who 
would feel an added responsibility because he had to sign or 
initial an efficiency report, but the great majority would give 
the inefficient old men the passing grade and would, if any- 
thing, sleep the more soundly for it. To get honest efficiency 
ratings that depend on judgment — of course, dishonest ones 
are of no utility whatsoever — the person who makes the re- 
port must know that employees recorded as having fallen be- 
low the required standard through old age or misfortune will 
be treated with consideration, and that in such cases excellent 
or good past records will excuse present shortcomings. Feel- 
ing assured of this fact, he will submit reports which are of 
real value in making promotions, in taking minor disciplinary 
action, and in general administration, but if he is not so as- 
sured, the efficiency rating system may in many instances de- 
generate into another piece of formal red tape. 11 

"The United States Department of Commerce and Labor made a 
careful set of efficiency ratings in 1909. In passing on these ratings, 
one of the decisions reached was "That due consideration should be 
given to the cases of veterans and those who have become more or 
less incapacitated for duty through long and faithful service." — 
Report of Secretary of Commerce and Labor, 1909, p. 68, Washing- 
ton, 1910, quoted in 26th Report of the United States Civil Service 
Commission, Washington, 1910, p. 141. 

The United States Commission on Economy and Efficiency made 
the investigation into the loss through superannuation (mentioned in 
note I, p. 63) entirely impersonal, but it says, "The commission is 
convinced, however, that the officers making the reports were still 
reluctant to turn in schedules that rated anyone as notably ineffi- 
cient," p. 38. 

12 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

The suggestion of a return to the spoils system is mentioned Return to 
merely for completeness. Opponents of civil service reform System 
often take pleasure in attributing all superannuation in the 
public service to the introduction of the merit system of select- 
ing persons for appointment. Obviously the method of select- 
ing employees has nothing to do with the superannuation prob- 
lem, except in so far as civil service regulations may set up 
maximum ages above which candidates will not be examined, 
limitations which probably did not have their counterpart un- 
der the spoils system. Superannuation is the inevitable out- 
come of reasonable permanency of tenure, regardless of how 
the appointments are originally made. England had the super- 
annuation problem long before it had a system of civil service 
examinations; in fact, the first requirement that new entrants 
to the English service should have a civil service certificate was 
contained in an act modifying the English retirement system, 
which had then been in formal operation for almost half a 
century. 12 Unless permanency of tenure is sacrificed, no rever- 
sion to an inferior method of selection for appointment can 
eliminate superannuation, and reasonable permanency of tenure 
is necessary if promising men are to be secured when young 
and trained for their positions so that the public may have 
the benefit of that expert service which comes mainly from 
proper training and long experience. 

The Elimination of the Disabled. The administrative prob- Nature of 
lems raised by the absence of any suitable system for retiring 
employees who have lost their efficiency in the earlier years 
of life, as the result of accident or disease, are in many ways 
similar to those involved by lack of provision for the super- 
annuated. The employee who has been disabled in early life 
is, if anything, more likely to excite the sympathy and com- 
passion of his fellow employees and is less likely to have means 
of providing for himself and his dependents if dismissed. His 

"First Report of Royal Commission on Civil Establishments, Brit- 
ish Parliamentary Papers, 1887, Vol. XIX, p. 422, London, 1887. 

13 



Problem 



RETIREMENT OF PUBLIC EMPLOYEES 

children, if he has any, are likely to be younger and less ca- 
pable of assisting in the support of the family. If, therefore, 
the disability does not prevent mere attendance and an appear- 
ance of performing some duties, the chances of retention in 
the service through compassion are great. 

The losses occasioned the government through disability are 
undoubtedly less than through superannuation, because disabil- 
ity resulting from accident or disease is generally less frequent 
and the employee is less likely to have attained a position 
where his inefficiency causes large indirect wastes. The pres- 
ence of disabled employees in the active service does, however, 
affect the morale of the force. To distinguish between in- 
efficiency that is due to accident or disease and inefficiency that 
is due to an aversion to work is not always easy, and may 
even puzzle experienced physicians. Natural shirkers and dis- 
contented employees may, therefore, take advantage of the 
pace set by superannuated minor employees and the disabled, 
and the administrator will have difficulty in applying dis- 
ciplinary measures. They do not press for a proper medical 
examination to determine exact conditions of the unsatis- 
factory employee, because, if the report should be that he is 
mentally or physically incapacitated, they have no adequate 
means of meeting the situation. They must either keep him 
or dismiss him. They do not want to dismiss the employee 
if it means want for him and his family, and they cannot very 
well keep him if they have asked an examination because of 
the man's inefficiency and have a formal report that it is due 
to physical or mental impairment. The general practice may 
safely be said to be to leave the employee unmolested and to 
reduce the evil in so far as is possible through the imperfect 
means at the administrator's disposal. 

Improvement of Morale. Improvement in the morale of the 
force will naturally result from increasing the opportunities 
for advancement in salary and in authority and responsibility. 
Under an adequate retirement system persons with capacity 

14 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

for leadership will be more generally retained in the service 
and will reach the higher positions while still in the prime of 
life and will leave them when their powers begin to fail. The 
general rapidity of the work will be increased, because those 
who are excusably slow from old age or disability will be more 
generally eliminated ; the others will have more inducement to 
exert themselves on account of the greater chance of winning 
some reward, and the few who are inefficient entirely from 
their own fault can be dealt with through the establishment 
of adequate efficiency ratings and suitable penalties uniformly 
enforced. The chances will perhaps be greater to raise in the 
force the enthusiasm of accomplishment. 

Retention of Men Now Lost. Retention in the service of 
some of the men who now leave will naturally result from the 
improvement in their chances to advance and from the assur- 
ance given them, through the retirement system that they, and 
probably those dependent upon them, will not be left in want 
in the event of disability resulting from sickness, accident or 
old age. Sometimes a retirement system provides an actual 
financial loss in event of resignation, and such a provision has 
its firm advocates, but a consideration of its merits and de- 
fects is a subject in itself. 13 Whatever the provision on this 
point, the general effect of a satisfactory retirement system 
is to improve the conditions of service and make those in it 
more willing to stay. 

Attracting Men to the Service. The general effect of a re- 
tirement system in attracting men to the public service is prob- 
ably somewhat overstated. The general testimony among 
English public servants of various classes is that the new 
entrant is chiefly concerned with the amount of the immediate 
wage and does not begin to attach importance to the provisions 
of the retirement system until he has been in the service some 
time and has assumed the responsibilities of family life. Then, 

18 See Chapter VII, p. 216, on a benefit in the event of withdrawal. 

15 



RETIREMENT OF PUBLIC EMPLOYEES 

according to the evidence, he probably attaches a greater im- 
portance to the benefits under the system than their money 
value warrants. Occasionally in the numerous reports of par- 
liamentary committees and royal commissions one will find, 
however, an employee who testifies not only that the retire- 
ment system was an attraction to him, but that it was his chief 
reason for entering the service. It would seem entirely rea- 
sonable to suppose that with the spread of movements toward 
vocational guidance and the increased tendency to judge a 
chance more by the future it offers than by the immediate 
wage, the government could, by a resort to suitable avenues 
of publicity, make the fact that it had an adequate and equita- 
ble retirement system prove a markedly attractive feature. 14 

Employees Improvement of Staff Sole Object of Government. Every 

Not Specially reason for establishing a retirement system thus far advanced 
Class can be summarized under the single broad heading of the 

improvement of the public service, and, in fact, that is the 
only reason why the government should establish one in its 
own interests. Sentimental arguments are sometimes ad- 
vanced to prove that the government owes some special charity 
to the man who has grown gray in its service. The right of 
a government benevolently to give unearned gratuities to a 
selected class of the public not economically dependent and 
not properly wards of the state is not only of doubtful consti- 
tutionality, 15 but of doubtful economic and social expediency. 
The government employees are not members of a specially 

14 The Massachusetts Pension Commission reported, ''The attraction 
of a better class of employees by reason of a pension is an unknown 
quantity, if it exists at all, and to justify the cost of a pension system 
on such an unknown factor would be illogical and unwarranted." — 
Massachusetts House Document, Xo. 2450, p. 182, Boston, 1914. 

15 For a discussion of the legality of state contributions to retire- 
ment systems in Massachusetts, see Report of the Commission on 
Pensions, House Document, Xo. 2450, Boston, 1914, pp. 177-179. See 
also article by Dr. Frank J. Goodnow in American Political Science 
Review, May, 191 1, on constitutionality of old-age pensions not based 
on need of poor relief. 

16 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

privileged class. They are no more entitled to public charity 
and benevolence than men who have grown gray in serving 
the public in some private capacity. 16 Public contributions to 
a retirement system are to be justified not on any ground of 
benevolence or philanthropy, but on the ground that they are 
payments to improve the character of the service and that, 
in so far as new entrants are concerned, the rights arising 
under the system are part of the compensation, paid in that 
form because experience has demonstrated that such a method 
of payment facilitates maintaining the force in a state of effi- 
ciency. Payments to employees already in the service may 
be justified on the ground that they are in the nature of com- 
pensation for depriving the employees of that prospect of re- 
tention in the active service, in event of disability from sick- 
ness, accident or old age, which was theirs on entering the 
service and which under the term "permanency of tenure" 
or "steadiness of employment" may have been one of the in- 
ducements to enter. In so far as the government consults 
its own interests alone, it establishes a retirement system 
purely as a business expedient to get better service. 17 

The Objects Sought by the Employees 
Future Entrants vs. Present Employees. In considering the The Differ- 

cnccs Be- 

interests of public employees in the establishment of a retire- tween the 
ment system, two distinct classes must be distinguished at the Two Classes 
outset: (i) those who are already in the service and (2) those 
who will enter after the system is in operation. The interests 
of the two classes are radically different. The present em- 
ployees are the survivors of a much larger number of original 
entrants, and their leaders, both officially and in their quasi- 

18 See "Teachers' Pensions in Great Britain," by Raymond W. Sies, 
United States Bureau of Education, Pamphlet 544, p. 74, Washington, 
1913. 

17 The National Civil Service Reform League considers that a re- 
tirement system can only be justified on the ground of increased efi> 
ciency. See their pamphlets, especially "Civil Pensions for Federal 
Employees," New York, 1909, p. 4. 

17 



RETIREMENT OF PUBLIC EMPLOYEES 



Unfor- 
tunate 
Natural 
Tendency 
ro Consider 
Present 
Employees 
Only 



official organizations, are generally the older employees. These 
leaders have, of course, escaped the danger of death in the 
early years of service and to a considerable extent the danger 
of disability that would necessitate resignation. They have 
usually become settled in their positions with little expectation 
of ever resigning to enter other occupations or, in the case of 
women, to marry. They have passed the period in which they 
could themselves contribute any material part of their own re- 
tirement allowance and the period in which their course of 
action in respect to remaining in the public service or resigning 
from it to accept other positions could be materially influenced 
by the establishment of a retirement system. To the oldest 
of the present employees the establishment of a retirement sys- 
tem by the government appeals as an act of grace, a benevolent 
award of just deserts for long and faithful service. To some 
extent the same attitude is held up by the other present em- 
ployees, but the extent diminishes rapidly as the more recent 
appointees are approached. They have almost the same point 
of view of men who enter after the system is established. 

To future entrants the system does not appeal as an act of 
grace; it is regarded as one of the inducements to enter the 
service and the prospective benefits are considered part of the 
compensation earned by services rendered. They have no com- 
punctions about objecting to any features which they consider 
undesirable, because they will consistently refuse to regard any 
benefit under the system as a gracious gift. 

One of the fundamental difficulties in the establishment of 
a retirement system has its origin in this marked difference 
in the attitude of the two classes of employees. 18 The natural 
tendency in establishing a retirement system is to make it meet 

18 For striking illustrations of these differences, see evidence in 
Report of Committee on the School Board, London Superannuation 
Bill, British Parliamentary Papers, 1890-91, Vol. XVII, London, 1891, 
and in Report of Committee on Teachers' Superannuation, British 
Parliamentary Papers, 1892, Vol. XII, London, 1892. These two 
reports give the proceedings preliminary to the establishment of the 
Elementary Teachers' Deferred Annuity Fund. 

18 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

only the needs of the present aged employees. They are the 
ones that the legislators and the administrators have in mind ; 
they constitute the immediate superannuation problem. They 
and the others who are approaching advanced age are fre- 
quently the only employees who are actively and vitally inter- 
ested in the establishment of the system. They are the officers 
and leading members of retirement associations and commit- 
tees, if not of various other quasi-official organizations. They 
are active themselves, and they are not infrequently disturbed 
over the lack of interest of the younger employees. To the 
younger employee, retirement because of advanced age seems 
very remote, and generally he does not realize the numerous 
ramifications of a retirement system that vitally affect his in- 
terests. Unless a proposal is made to withhold something 
from his salary in the way of contributions, he is content to 
let the older employees get the system through, trusting that 
whatever is for the interest of the older employees is for his 
interest also. The position of the future entrant is naturally 
worse, for he is not yet in a position to be heard. Within a 
comparatively few years, however, the new entrants will make 
up the greater part of the service and within about eighty 
years the system will exist solely for them, yet the representa- 
tives of the employees that appear before the committees are 
generally men of long service well past middle age. 

The results following this natural course of development are Bad Results 
not infrequently disappointing if not disastrous. Future em- j™? 1 . 
ployees, after entering the service, find the system ill-adapted Natural 
to their needs because it does not provide for the contingencies n ency 
of life which they have to face. The older employees who 
secured the establishment of the system, or who were con- 
sulted in connection with its establishment, could not appre- 
ciate the attitude of new men toward a forfeiture of any rights 
in event of death, early disability or resignation, because they 
themselves had escaped those risks. To sacrifice all other bene- 
fits for a substantial benefit on retirement because of old age, 
with perhaps a little something if death came soon after re- 

19 



RETIREMENT OF PUBLIC EMPLOYEES 

tirement, seemed to them all that was required by any em- 
ployee, because it was all that they required. To the new em- 
ployee death in the active service or early disability from dis- 
ease are the immediate fears, and he does not want to protect 
himself against old age by sacrificing or curtailing his protec- 
tion against what he considers his real dangers. Accordingly, 
he organizes associations and committees to demand the re- 
form of the system. 
Difficulty Reforming a system is, if anything, more difficult and more 

s tem rimng contentious than establishing one in the first instance. Natu- 
ral forces have preserved the conflict of interest between the 
older employees on the one hand, and the younger employees 
on the other, and, in addition, vested interests have arisen 
under the system first established. Each group now has an 
immediate concern in all the questions involved. A bitterness 
has been engendered in some reorganizations that has threat- 
ened the existence of those cordial relations between younger 
employees and older employees that are essential in the con- 
duct of any public service. Pension legislation is not infre- 
quently a perfect illustration of the legislative sins of the 
fathers visited upon the children unto the third and fourth 
generation. 

The Future Entrants to be Considered in Devising Permanent 

Method System. Obviously the scientific method of developing a re- 

tirement system is to consider the needs of the future em- 
ployees and in so far as possible to meet them. In a compara- 
tively short time the present employees of advanced age will 
have passed out of the service and any serious defects in the 
system from the point of view of new entrants will have begun 
to develop as grievances. The needs of future employees can 
be considered dispassionately. After a more or less ideal 
system for future entrants has been devised and established, 
a modification of it can be used temporarily to meet the re- 
quirements of present employees who cannot be fitted into the 
permanent system. This procedure requires forethought, but, 

20 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

as in so many other cases, legislative forethought produces far 
better results than legislative afterthought. Throughout the 
principal part of the present volume, the discussion of the 
interests of the employees will be confined to the interests of 
employees who have entered after the system has been estab- 
lished. Toward the end of the volume a chapter is devoted en- 
tirely to the differences between the interests of the two classes 
and the modifications in a system that may be needed tempora- 
rily to make it meet the requirements of present employees. 19 

The Point of View of Future Entrants. The point of view Basis 
of employees entering the service after the establishment of ^ atem 
a retirement system and to a certain extent of the younger 
employees who were in the service at the time of establishment 
can, of course, be determined fairly accurately from the testi- 
mony given in connection with various reorganizations of re- 
tirement system that have taken place in Great Britain and 
Ireland. It would seem reasonable to suppose that public em- 
ployees in this country will show at least as much understand- 
ing and independence in the event of reorganization as have 
the various classes of public servants in that country. Such 
an assumption seems well supported by the history of the New 
York school teachers' fund and by the differences that have 
arisen among employees of the federal government regarding 
the type of system they would have. The point of view of 

""With regard to the adjustment of a sound scheme to the interests 
of the existing teachers, I have said that I think any scheme adopted 
should be drawn up so as to be just and sound for people coming in 
de novo: that is to say, ab initio. When you have matured that 
scheme, I think it would be fair to consider the question of giving 
some consideration to the existing teachers, whether board or volun- 
tary, throughout the country; not of course to give them the full 
benefits to which persons are entitled who have contributed from the 
beginning, but something in the form of a compassionate allowance 
so as to adjust the transition from the old system without superannu- 
ation to the new system with superannuation." — Testimony before the 
Committee on the School Board, London Superannuation Bill, Brit- 
ish Parliamentary Papers, 1890-91, Vol. XVII, London, 1891, p. 50, 
question 880. 

21 



RETIREMENT OF PUBLIC EMPLOYEES 

future entrants may, perhaps, be fairly summarized as fol- 
lows: 



Compensa- 
tions and 
Not Charity 



All rights and privileges under the system are in reality 
parts of the contract of employment and constitute part 
of the consideration offered to the employee by the gov- 
ernment for his services. 

The employee earns all he gets and the system involves 
no element of charity or philanthropy. 20 

To request a change in the system is not to look a gift 
horse in the mouth. The retirement system is in many 
respects like any other part of the employment contract, 
wages, hours of work, or conditions of labor, and within 
certain limitations is open to discussion at any time. 



20 The following testimony given by a railway employee before the 
Board of Trade Committee on Railway Superannuation Funds (Brit- 
ish Parliamentary Papers, 191 1, Vol. XXIX, Pt. 1, p. 93, questions 
2459 and 2460) is perhaps typical. 

"The effect of a pension fund is that the company get the services 
of experienced and tested men at a smaller salary than if there had 
been no pension fund. Men are deterred from leaving the service on 
account of their prospective pensions. ... If there had been no 
pensions to look forward to, of course the salaries would need to be 
higher. We consider that the salary and the pensions are the con- 
siderations for which we give our services and, of course, if we know 
we have a pension to look forward to, we are more content with a 
smaller salary. That is always taken into consideration and many 
of my acquaintances in the service have refused to leave the service, 
although they have been offered a larger salary, because of the pros- 
pective pension." 

The following testimony of a government employee, given before 
the British Royal Commission on Superannuation and Civil Service 
(British Parliamentary Papers, 1903, Vol. XXXIII, p. 84, question 
2334) is also fairly typical. "Now speaking, at any rate, personally for 
myself, I think there is a great deal of Phariseeism in that, that the 
pension system arises out of the fact that the government authorities 
do not like to see their servants practically in the gutter in old age. I 
believe that not only the government services, but the great com- 
panies and others bring up these systems not from a point of view 
of charity at all, but simply to secure and retain the services of experi- 
enced servants and so far as a company may be said to contribute to 
such a fund, I most unhesitatingly assert that it is simply a portion o* 
the man's wages paid year by year for a specific purpose : it is simply 
paid in another way." 

22 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

The prudent, thrifty employee who is fortunate in 
escaping the dangers of life and is wise in his choice 
of investments could do better by taking the cost of the 
retirement system in wages or salary. 

The retirement system should not protect the em- 
ployees from one contingency of life by increasing their 
loss in the event of the happening of one of the other 
contingencies. The contingencies generally recognized 
are death, disability, old age, dismissal and, to a certain 
extent, voluntary resignation. 

As a class the employees are inclined to accept tacitly that Positive 
an adequate and equitable retirement system is for their best Advantage 
interests as a body. After a system has been established, gen- ployees 
erally through the activities of the older employees whose 
arguments in favor of it scarcely reflect at all the attitude of 
future employees, the members who appear before commit- 
tees to testify regarding its operation are mainly concerned 
with objections to some particular details, and they rarely go 
into the question of the general merits of the idea as a whole. 
It is indeed significant that in the voluminous mass of evidence 
contained in the British parliamentary papers of the past cen- 
tury, during which time that country has frequently been con- 
cerned with the organization or reorganization of retirement 
systems for public servants of one class or another, no record 
was found, with a single unimportant exception, 21 where any 
distinct body of employees preferred no retirement system 

n "At our asylums we have a number of artisans who, about five 
years ago, petitioned that they might be put entirely upon trades union 
rate of wages and the option was given to them, either to remain 
under the terms they were with pensions or to go at once to trade 
union terms and these four hundred men elected to have a larger 
immediate salary and forego all the rights to pension and sick pay 
and that kind of thing," Sir J. McDougall, of the London County 
Council, testifying before the British Royal Commission on Superan- 
nuation in the Civil Service, British Parliamentary Papers, 1903, Vol. 
.JXXIII, p. 138, question 3817. For more details, see questions 3894 
and 3910. 

23 



RETIREMENT OF PUBLIC EMPLOYEES 

to any retirement system. The employees' arguments in favor 
of a retirement system may be pieced out from the evidence 
given in different connections somewhat in this way : 

"The existence of a retirement system increases the 
opportunity for advancement and improves the general 
conditions of the service. 

It causes us all to protect ourselves systematically, to a 
certain extent, against the happening of the principal 
danger of life, sometimes through the introduction of 
insurance against permanent disability, without which 
reasonable protection would be difficult to secure even 
through expensive private insurance. 

Unless we had such a system, cases of improvidence, 
want and great suffering would occur among us or our 
families, as they did before the establishment of the sys- 
tem. These cases might arise because of death or total 
disability of the breadwinner occurring early in life be- 
fore he had had opportunity to make provision or on the 
happening of the same events later, if the breadwinner 
was lacking in the virtue of thrift. 

The incentives to save are not great in the public serv- 
ice. The employee has no chance to become a part owner 
in the business or to go into business for himself; his 
official and social position are determined more by the 
office he holds than the amount of his accumulations ; and 
his security of tenure promotes a sense of general se- 
curity. 22 

Even if the employee has been thrifty, he may lose 
money through unwise investments because he is inex- 
perienced in business transactions and has little oppor- 
tunity to work with his own money, as many men in small 
businesses do. 

23 For a discussion of the effect of the modern industrial system in 
diminishing the strength of the forces producing individual saving 
and thrift, see Social Insurance, by Henry R. Seager, Macmillan 
Company, New York, 1910, pp. 10 and II. 

24 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

The retirement system frequently appeals to us particu- 
larly because it compels us to save and furnishes us with 
a safe investment, giving a reasonable return and prac- 
tically perfect security." 

The Objects Sought by the Public 

The advantages to the general public of a well-designed re- 
tirement system are that it improves the quality of the govern- 
mental service and provides support systematically not only for 
employees who through its provisions are eliminated from the 
service, but also for those employees who, even in the absence 
of a system, are forced to resign, sometimes in poverty, be- 
cause accident, disease, or old age prevents them from fulfill- 
ing even the minimum requirements of their offices. To a lim- 
ited extent, the system may even provide something for 
widows, orphans or other dependents in the event of death 
of the breadwinner. It is, therefore, a constructive social 
measure, because it tends toward greater stability and inde- 
pendence and reduces the need for public and private charity ; 
and it does this by compelling the employees while possessed 
of full earning capacity to save part of their compensation for 
services rendered in order that they may be protected when 
their earning capacity fails. 23 

a For a report which clearly recognizes the importance of the social 
aspects of a retirement system, see "Establishment of a Superannua- 
tion Fund for the Whole of the Government Service : Report of the 
Committee and of the Actuarial Sub-Committee," Sydney, New South 
Wales, 1912. Louis D. Brandeis has written: 

'Given the status of employee for life and the need of an old age 
pension is obvious. The employee needs the pension because he can- 
not — or at least does not — provide adequately from his wages for the 
period of superannuation. The employers need a comprehensive pen- 
sion system because while the presence of the superannuation em- 
ployees in a business seriously impairs its efficiency, the dictates both 
of humanity and of policy prevent discharge unless their financial 
necessities are provided for. The demand for a pension system grows 
more pressing as businesses grow more stable; for in older businesses 
there is a constant tendency to accumulate superannuated employees. 
The demand becomes particularly acute when businesses grow large 
as well as old ; for then it becomes difficult to provide for the individ- 

25 



RETIREMENT OF PUBLIC EMPLOYEES 

The Objections to the Establishment of a Retirement System 

Objections to the establishment of a retirement system are 
raised, of course. From the point of view of the government 
as a large employer, they are directed against specific details 
of the scheme rather than against the idea as a whole and can 
best be considered later in the discussion of the exact pro- 
visions. The same statement is generally true of the objec- 
tions raised in the interests of the employee. One objection 
raised by certain employees, however, goes to the root of the 
whole matter and is general in its nature — namely that a retire- 
ment plan should not be compulsory. 

individual Objection of Employees to Compulsory Features. Em- 

erty ployees here and there, rarely any very considerable number, 

will take this position. The cost of benefits granted by the 
system is borne ultimately by the employee, regardless of who 
turns the money into the fund, for the benefits become part 
of the compensation. The liberty of the individual employee 
to take his compensation in cash and to do with it as he will 
should not be infringed. Any retirement system that impairs 
this liberty is bad, and they advocate either retention of the 
present system of no retirement benefits or else the establish- 
ment of an optional system. 24 

Optional General experience with optional systems of social insurance, 

Systems 



Ineffective 



ual needs of the abnormal employee.'' Our New Peonage : Discre- 
tionary Pensions, in his Business a Profession, Boston, 1914, p. 66. 
24 The London County Council Superannuation and Provident Fund 
Act overcomes this objection in part by the excluding from compul- 
sory membership : All persons who shall annually prove to the satis- 
faction of the Council that they have made and are continuing to 
make either by being members of a friendly or benefit society or by 
insurance or in any other manner such provisions to meet the events 
or contingencies provided for by this scheme, as will secure to them 
(or in case of death to their representatives) no less benefit sub- 
stantially than would in the same events or contingencies, have been 
secured to them under this scheme, had they been contributors to the 
fund. — Superannuation and Provident Fund, London County Coun- 
cil, January, 1913, par. 5, p. 4. 

26 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

and retirement funds, 25 and the experience with optional sys- 
tems of life insurance in the English civil service, 26 tend to in- 
dicate that they do not meet the requirements, because many 
employees do not join. An administrative officer confronted by 
the case of a man who, through accident or disease, is no long- 
er really fitted to do his work but is still able to report for duty 
and to make an appearance of activity, would find scant com- 
fort for having that man dismissed in the fact that had the man 
been willing to join the association he would not now be un- 
protected and there would be some provision for his wife and 
children. The man would invariably have an excellent reason 
for not having joined the fund; his family demands were too 
great; he had a plan of saving that would have beaten the 
system ultimately if it had not been for this accident or sick- 
ness or if very attractive investments had not proved worth- 
less. The government may easily fail of the accomplishment 
of those purposes which lead it and the general public to the 



M Report of the Massachusetts Pension Commission, Massachusetts 
House Document, No. 2450, Boston, 1914, p. 15. — "The Moral Influ- 
ence of a University Pension System," by Henry S. Pritchett, Popu- 
lar Science Monthly, November, 191 1, p. 505, New York, 191 1. — "So- 
cial Insurance," by I. M. Rubinow, p. 345. — "Statistics of the Civil 
Service," by William Farr, December 18, 1848, before Statistical 
Society of London in its publications. See also his testimony before 
the Select Committee on Civil Service Superannuation, British Parlia- 
mentary Papers, 1856, Vol. IX, p. 184, London, 1856. — "Old Age Pen- 
sions vs. Old Age Annuities," by Miles M. Dawson in Bulletin des 
Assurances Sociales, Paris, 1912, Tome 23, pp. 33-61, Congress Inter- 
national des Assurances Sociales. 

M Of the 14,645 officers on the establishment who received £160 
($778.64) or over and for whom information was available, 3,842 
made no claim for a reduction of income tax because of life insur- 
ance premiums paid for the year ending March 31, 1902. See Report 
of Commission on Superannuation in the Civil Service British Parlia- 
mentary Papers, 1903, Vol. XXXIII, pp. viii and ix, and Appendix, p. 
218. The figures are reprinted in "Civil Service Retirement, Great 
Britain and New Zealand," by Herbert D. Brown, Senate Document, 
No. 290, 61 st Congress, 2d Session; reprinted as Appendix B, in the 
Report of the Commission on Economy and Efficiency on "Retirement 
from the Classified Civil Service of Superannuated Employees," 
House Document 732, 62d Congress, 2d Session, Washington, 1912. 
p. 163. 

27 



RETIREMENT OF PUBLIC EMPLOYEES 

establishment of the system, unless membership at least for 
all new entrants is compulsory. 
Argument In favor of compulsion a strong theoretical case can be 

pulsion made. The government may say that the people desire to 

be model employers and the compensation they pay to the em- 
ployee during his years of active service is intended to be suffi- 
cient to enable him to insure some provision for himself and 
family in case his earning powers are impaired by sickness, 
accident or old age. If this compensation is paid to the em- 
ployee in cash at the time the services are rendered, he may 
dissipate it; and, if he loses his earning power, he may come 
to the public asking for a type of charity — retention on the 
active rolls after he is unable to work — a request made neces- 
sary because he has spent that part of his wages which he 
should have saved or used for the purchase of sickness or acci- 
dent insurance. The government must protect itself against 
this type of appeal and can only do so by withholding the re- 
quired amount from current pay and giving it when needed in 
the form of a retirement allowance. The government thus 
insures its employees, and, at the same time, attempts to in- 
sure itself against the improper retention of incapable persons 
in the active force. 27 

The _ five Objections Raised by Public. The principal objections 

Enumerated to a retirement system are those raised by the general public. 28 
The five that follow may be enumerated as the ones most com- 
monly advanced. 

i. It keeps in the service men who should be eliminated. 

2. It discourages personal thrift. 

3. It attacks the problem from the wrong side, since what 

is needed is general instruction in the use of money. 



"This is essentially the argument of the Massachusetts Pension 
Commission. See Report, Massachusetts House Document, 2450, p. 
13, Boston, 1914. 

28 "Retirement Legislation" New York Civil Service Reform Asso- 
ciation, p. 5. 

28 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

4. It creates a specially privileged class, supported in old 

age, or in the event of earlier disability, at the ex- 
pense of the taxpayer. 

5. It opens the door of the treasury to a pension graft. 

Each of these objections deserves special consideration. 

The argument that a retirement system keeps in the service Tendency 
men who should be eliminated is based on the following ex- i mproper 
perience common under a defective system. An employee be- Ret ention 
comes inefficient from some cause other than old age, accident pioyees 
or disease, which will not entitle him to an allowance, and 
he should, therefore, be dismissed. The administrator, how- 
ever, does not dismiss him at once because to do so would 
mean not only loss of immediate salary, but also loss of that 
provision for old age which would be his should he continue 
in the service longer, sometimes even a very little time longer. 
That this objection is one of weight is not to be disputed, but 
it is one that can be largely overcome by a wise development 
of the detailed provisions of the system. It is of applicability 
only if the system is not well designed and provides for a for- 
feiture on withdrawal from the service whether by dismissal 
or by voluntary resignation. If the system gives a man the 
value of his accumulated rights under the system in event of 
resignation or dismissal, it may even facilitate removal in such 
cases. This whole matter is considered more in detail in Chap- 
ter VII, pages 216 to 232, which deals especially with the 
question of a benefit in event of withdrawal. 

That a retirement system discourages personal thrift is a Dis- 
difficult thing to prove or disprove. That it forces some peo- Thrfft eS 
pie to make provision for the future who are utterly lacking 
in the virtue of thrift and that it may easily be made to in- 
clude a comparatively inexpensive system of insurance against 
permanent disability in the early years of life, thus giving a 
protection which individual thrift alone cannot possibly equal, 
are frequently regarded as being distinct merits of the system. 
It accomplishes systematically and uniformly much of the 

29 



RETIREMENT OF PUBLIC EMPLOYEES 

social good that individual thrift achieves, and it accomplishes 
some things which individual thrift cannot achieve. What it 
does to the virtue of thrift as an element of moral character 
can scarcely be determined. 29 Much would depend on the 
nature of the system, and, of course, the point will be con- 
sidered again in connection with the detailed provisions, es- 
pecially with those concerning contributions by the employee. 
Dr. Henry S. Pritchett, who has had a rather exceptional 
opportunity for observation through his connection with the 
retirement system for college teachers, established under the 
Carnegie Foundation for the Advancement of Teaching, has 
advanced the interesting theory that it may actually promote 



29 The following quotation from the Webbs' "Prevention of Desti- 
tution" dealing with general compulsory social insurance, is an excep- 
tionally strong statement of the thrift argument. It is questionable 
whether the latter part of the argument is applicable to a retirement 
system in which the benefits become part of the compensation for 
services rendered: 

"But compulsory insurance is almost a misnomer. The special 
features of thrift or foresight, the independence in self-government 
and the willingness to subordinate the present to the future, which 
are, as we have seen, characteristic of the insurance which is an 
optional and voluntary act of individual prudence, disappear alto- 
gether in a national and compulsory and universal system. Com- 
pulsory insurance as we see it in the German Empire, and as it is 
embodied in the Chancellor of the Exchequer's scheme of 191 1, with 
the automatic and obligatory deduction from wages, entails on the 
contributor no act of thrift, involves no exercise of the quality of 
foresight, demands no responsibility for administration and implies 
no subordination of present impulses to future needs. The contri- 
bution arbitrarily levied on every wage earner amounts to nothing 
more nor less than a tax — the poll tax that we got rid of in 1381 — 
having no connection with the idiosyncrasy of the contributor, and 
no more influence on his moral character than any other tax. More- 
over, the beneficiaries have to recognize that, as in the case of any 
other government service, they are reaping what they have not them- 
selves sown. For it must be remembered that in the Governmental 
system of sickness insurance and indeed in practically every universal 
and compulsory scheme, the beneficiaries can no longer pride them- 
selves on paying their own benefits. A considerable proportion of the 
funds are contributed from other sources; from the employers who 
are not entitled to benefits, and from the Government, involving taxa- 
tion upon all the persons, rich and poor, who are outside the scope 
of the scheme." — "The Prevention of Destitution," by Sidney and 
Beatrice Webb, Longmans, Green & Co., London, 191 1, p. 169. 

30 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

thrift; that the individual college teacher frequently feels that 
the task of securing protection against the risks of life through 
private thrift is hopeless and therefore he takes his chances 
except, perhaps, for life insurance, whereas, under a retire- 
ment system, which makes a minimum provision certain, he 
saves to provide for the private objects of life that are not 
covered by the system. 30 Thrift is the product of foresight, 
and the supposition does not seem unreasonable that it may 
be promoted by a system which frequently brings to the mind 
thoughts of the important dangers of life and fairly definite 
ideas regarding the sums that will be available to meet those 
dangers if no special thrift is practiced. 

Education in the use of money and the establishment of a Education 
retirement system hardly seem mutually antagonistic. Educa- Money ° 
tion in the common schools in the use and management of 
money can doubtless be carried very much further than at 
present with great advantage to the public; and it is probably 
highly desirable that every pupil should have at least an ele- 
mentary knowledge of the broad general facts regarding the 
earning power of money, the commoner types of savings in- 
stitutions, the various kinds of insurance, methods of home 
purchasing and the costs of installment purchases for con- 
sumption, credit, small purchasing, and small loans, and the 
dangers of "get rich quick" institutions. Such knowledge 
would doubtless lead a person to attach a proper value to a 
retirement system. He would not be so likely to be misled by 
one which offers apparently attractive benefits but lacks suit- 
able provision for raising the money to pay them, and he 
would appreciate the merits of one which, though promising 
less, will fulfill more. 31 A retirement system, in so far as new 
entrants are concerned, is virtually a financial institution and, 

K "The Moral Influence of a University Pension System" in Popular 
Science Monthly (New York), November, 191 1, p. 508. 

"For an article emphasizing the importance of thrift and educa- 
tion in sound principles of saving, investment and insurance, see 
"Poverty and Pensions in Old Age," by Frederick L. Hoffman, Ameri-'' 
can Journal of Sociology, September, 1908. 

3 1 



RETIREMENT OF PUBLIC EMPLOYEES 



Creating 
Specially 
Privileged 
Class 



incidentally it may be added, should be subject to the usual 
state supervision exercised over financial institutions. 

To charge that a retirement system creates a specially privi- 
leged class supported in old age, or in the event of earlier disa- 
bility, at the expense of the taxpayer, is to ignore the situation 
which generally exists in the absence of a retirement system. 
It could be more fairly stated that an adequate retirement sys- 
tem endeavors to reduce to a minimum that special privilege 
which is inherent in the nature of public service and which 
public servants therefore necessarily enjoy. It provides further 
for equality of treatment of all public employees, so that the 
man who is totally disabled and can no longer report for duty 
may not suffer total loss while his former fellow employee, 
who may be no more efficient but is better able to get about, 
enjoys the privilege of drawing full salary on the active rolls. 32 



32 "Secretary MacVeagh has most clearly pointed out that except 
with employees of peculiar hardness, all governments and institutions 
conduct their operations really as an imperfect pension system. The 
Secretary writes in his report for 1909: 'The service is blocked in 
many instances by the unwillingness of the officials in charge to throw 
out of place worthy men and women who have given the best of their 
lives to the work of the government. So that, in a very imperfect and 
unsatisfactory manner, a pension system is and long has been in 
operation.' Every college officer appreciates the fact that the colleges 
are also operating, in this imperfect sense, a pension system, but 
one qualified at every step by favoritism or partiality. One who has 
occasion to visit many colleges of the country will be astonished at 
times by two methods of procedure in this matter, diametrically 
opposite, and yet entirely to be reconciled with the methods under 
which our colleges are governed. He will be astonished in the first 
place at the inhumanity which will turn out an old teacher after long 
service with no means of support. He will be astonished in the second 
place at many institutions by the presence in the faculty of a consid- 
erable proportion of teachers who have long outlived their usefulness 
and who are practically pensioned by their retention in the service. It 
is not one of the smallest of the disadvantages of this form of pension- 
ing that the presence of the aged and the infirm often arouses in the 
minds of shallow and impatient men a disregard for the really 
superior qualities which many of these in advanced age possess. 
There are always those who believe under such circumstances that 
all can be remedied by a sweeping edict which often tears down more 
than it builds up." — Moral Effect of University Pension System, by 
Henry S. Pritchett, Popular Science Monthly, New York, 191 1, p. 506. 



32 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

It is a condition and not a theory ; and the general experience 
of the more important foreign governments, which are reputed 
to have a type of public service far higher than is secured in 
this country, has led them practically without exception to es- 
tablish retirement systems. Establishing a system is essen- 
tially a business measure, but one that can easily be given 
the color of special privilege, charity, or benevolence. The 
objection that naturally arises against what appear to be spe- 
cial privileges for government employees is an important con- 
sideration in developing a system and is considered more at 
length in the chapter on the contributory as opposed to the 
non-contributory systems. If a provision is included that re- 
quires new entrants to pay for their retirements, either in 
whole or in part, the chances for popular misunderstanding 
of the exact nature of the system are reduced to a minimum. 33 

88 "A popular objection to municipal pensions, which influences many 
voters and taxpayers to oppose the establishment of retirement sys- 
tems for city employees, emphasizes the injustice of taxing workers in 
general for the benefit of a special class of employees. The attitude 
of the man who urges this objection is that the class of municipal em- 
ployees is a peculiarly favored one; the members draw good pay in 
easy berths, they ought to take care of themselves in old age. 'Why 
should I be taxed,' the objector asks, 'in order to provide pensions 
for this favored class?' If pensions are to be granted at all, it is 
contended, they ought to be passed around to workers of all classes. 
It is unjust to single out any special group of beneficiaries. In this 
connection there appears to be a particularly strong objection in the 
minds of many opponents of municipal pensions to the payment of 
retirement allowances to clerks and salaried employees. Some who 
approve of retirement allowances for common laborers earning small 
wages strenuously object to the extension of the benefits of the retire- 
ment system to better paid employees. It is argued, in support of 
this objection, that the handicap of age is much less in the case of 
clerical employees than in the case of manual laborers. It is said 
that an old man can push a pen when he could not swing a pick 
effectively. ... It is to be observed that this contention rests on the 
assumption that a retirement system must involve an additional bur- 
den to the taxpayers. This assumption is entirely gratuitous. It 
would certainly not hold true of a properly organized contributory 
system with a large share of the expense borne by the employees. 
Private corporations even regard a wholly non-contributory system in 
which the pensions are paid entirely by the employer, as economical. 
It is reasonably certain that a contributory system, such as is proposed 
in the Massachusetts act, would, in the long run, save money for the 

33 



RETIREMENT OF PUBLIC EMPLOYEES 



Danger of 

"Pension 

Graft" 



Necessity 
for Expert 
Actuarial 
Advice 



The real danger of a retirement system is that it may open 
the door of the public treasury to a pension graft. The gov- 
ernment employees become an organized force with an imme- 
diate personal interest at stake, whereas the general public — 
the people who pay the taxes in the first instances and those 
to whom at least a portion of the burden is ultimately shifted 
— have at most a very slight personal interest in the system, 
especially if the money to pay the costs of government is col- 
lected through indirect taxation. The great danger of such a 
situation is that little by little the organized, active employees 
will gain from the legislative authorities, especially just prior 
to elections, one concession after another. When at length the 
burden on the taxpayers and through them upon the public as 
a whole becomes sufficiently great to cause the worm to turn, 
vested interests will have arisen and reform will be difficult. 

Unfortunately, retirement legislation is peculiarly sus- 
ceptible to abuse of this character. The employees ask for 
what appears on the surface to be but a minor concession, a 
slight increase in the retirement allowance or a slight modifica- 
tion of the rules to permit retirement just a few years sooner, 
at sixty-five instead of seventy or at sixty instead of sixty- 
five. They offer plausible figures to show how little the cost 
will be. They frequently consider only the one factor of in- 
crease that is obvious and neglect to consider the numerous 
factors that are hidden. That accurate figures can only be 
secured by an expert actuary after long and painstaking in- 
vestigations they either do not know or are unwilling to admit. 

taxpayers. Such saving would be effected in three ways: First, 
through elimination of the direct waste of money paid to aged em- 
ployees who have outlived their usefulness : second, through stoppage 
of the indirect loss entailed by the slow pace forced upon the rest of 
the workers by the presence of inefficient veterans; third, through the 
positive gain that would result from the substitution of younger men 
for the superannuated employees, from the increased efficiency pro- 
moted by the retirement system and possibly from the attraction of 
a higher grade of men into the municipal service." — "Retirement Sys- 
tems for Municipal Employees," by F. Spencer Baldwin, in "Annals 
of American Academies of Political and Social Science," Vol. 38 
(1911), p. 13. 

34 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

Not infrequently they bring forward tables of cost, which they 
present as absolutely conclusive, because, forsooth, they were 
prepared by an expert accountant. Unless the expert account- 
ant is also an expert actuary, he ventures beyond his field when 
he touches the complicated actuarial problems involved in a 
retirement system, requiring for their solution a complicated 
application of the mathematical rules of probability. The 
small-caliber legislator who is anxious to curry favor with the 
organized employees, knowing that the general public is unor- 
ganized and somnolent, is not infrequently the same man who 
has a profound contempt for experts. Give him pencil and 
paper and in a few seconds he can do all the figuring that is 
worthy of a representative of the richest people on earth when 
dealing with the employees who have grown old and feeble 
in long and faithful service to the government. His figures 
will convince him that those furnished by the employees' lob- 
byists are conservative ; and unfortunately the retirement prob- 
lem is so deceptive that for the first few years the improperly 
derived figures may be abundantly proved by actual experi- 
ence. It may not be apparent until after the lapse of many 
years that somebody blundered. 

If it were not for those broad-gauge men in legislative as- 
semblies who believe that a division of labor in public affairs 
is just as essential as a division of labor in private affairs and 
who demand that in legislating on technical subjects experts 
in those subjects be consulted, the ordinary citizen who has the 
public interest at heart would have to oppose all retirement 
legislation and accept the retention of the old and disabled on 
the active rolls as probably the lesser of two evils. Given, 
however, a legislative authority that is willing to recognize 
the three parties to the problem and to have the general public 
represented at least by a properly qualified actuary furnished 
with the funds and assistance needed for a reasonably accurate 
determination of the future costs of all proposals, 34 as is set 

84 "I think it may be laid down as an axiom that no one is able to 
form a fund on safe lines until he knows how to value one. When 

35 



RETIREMENT OF PUBLIC EMPLOYEES 

out more at length in Chapter XVI, it would seem entirely 
possible in this country, as it has been abroad, to develop re- 
tirement systems that will overcome the evils inevitable in its 
absence and at the same time protect the treasury from ex- 
ploitation. Perhaps this country is fortunate in its prima 
facie opposition to retirement legislation for public employees 
if that opposition can be made to prevent further establishment 
of ill-considered retirement systems. 

In connection with this subject of the danger of exploita- 
tion, the chapter on the contributory vs. the non-contributory 
system is of importance, as also is Chapter XVI, which de- 
scribes generally the establishment and maintenance of a sys- 
tem in the actuarially reserve basis. A system conducted on 
the actuarial reserve basis and supported in a considerable 
measure by the contributions of the employees, in the form 
of salary deductions, probably reduces to a minimum the dan- 
ger of a retirement graft. The danger is, however, one that 
must be kept in mind constantly. 

Summary 

To summarize the objects and interests of the three parties 
to the systems briefly it may be said that : 

The government as an employer seeks only the improve- 
ment of the force. 

The employees, the new entrants only being considered, seek 
a sound, adequate and equitable financial institution through 
which at minimum cost they may be protected in the event of 
the happening of certain of the principal dangers of life. 

The general public desires that each of these two objects be 

you are asked to form a fund, you must ask what the subscriptions 
are to be and what benefits are to be given and whether the employer 
is prepared to start the fund with a substantial sum down and 
whether he is prepared to guarantee a certain rate of interest. 
You will then ask for the same information that you would require 
for a valuation. You will then have to go through the whole process 
of constructing a table of multipliers according to the benefits." — 
Staff Pension Funds by H. W. Manly, Journal of the Institute of 
Actuaries, Vol. XXXVI, London, 1902, p. 256. 

36 



OBJECTS SOUGHT IN ESTABLISHING SYSTEM 

realized so that it may be protected on the one hand from 
these losses resulting from inefficiency in government service 
that are inevitable in the absence of a system, and on the other 
hand from the expense of supporting through public or private 
charity those who are forced to leave the service because of 
inefficiency due to old age, accident or disease. 

The real danger in retirement legislation is that it may re- 
sult in exploitation of the public treasury, and this danger is 
one to guard against in progressing rather than one to prevent 
progress. 



CHAPTER II 

ANALYSIS OF THE PROBLEM OF DEVISING AN 
ADEQUATE RETIREMENT SYSTEM 

Purpose of Chapter. The Future Entrants and the Present Employ- 
ees. The Contingencies Involved. Shall a Benefit be Granted? 
Upon what Conditions? The Superannuation Benefit. The Dis- 
ability Benefit. What Amount and How Determined? The Super- 
annuation Benefit. The Disability Benefit. The Disability Due to 
Performance of Duty. The Withdrawal Benefit. Benefit in Event 
of Death in Active Service; Ordinary Causes; From Causes Aris- 
ing in Performance of Duty. Death After Retirement. The Cost 
of the Benefit. Number of Benefits and Cost. Conditions Upon 
Which Granted and Cost. Amount of Benefit and Cost. Equities 
Between Individual Employees and Cost. Age at Entrance, Sex, 
Occupation and Cost. Division of Cost Between Government and 
Employees. Exaggeration of the Importance of the Issue. Method 
of Determining Real Significance. The Basis of Division. 
Actuarial Reserve vs. the Assessment System. Description of the 
Two. The Merits of the Two Contrasted. Necessity for Actuarial 
Computations. The Actuarial Deficit on Creation of System. Sys- 
tems for Small Services. Bad Financial Practices. Protecting Sys- 
tem from Financial Indiscretion of Employees. Arrangement of 
the Detailed Discussion. 

Purpose of Chapter 

The objects which the government as an employer, the em- 
ployees, and the public seek to obtain through the establish- 
ment of a retirement system were considered in the preceding 
chapter. A fair conclusion to be drawn from that chapter 
is that the government, in its own interest, must guarantee 
to its employees reasonable permanence of tenure, and that 
to eliminate the losses from superannuation and disability, 
which follow from permanence of tenure, it must establish an 
adequate retirement system. An adequate retirement system 
may be defined as one that fulfills the requirements of that 
branch of the public service to which it applies and is at the 

38 



PROBLEM OF DEVISING RETIREMENT SYSTEM 

same time fair to the employees as a class and to individual 
employees, satisfactory to a public appreciative of the social 
value of such a system, and financially sound. The following 
pages of this book are devoted to a consideration of the myriad 
questions of fairly minute detail which have to be considered 
in devising such a system. The object of the present chapter 
is to set forth the major questions involved, without any de- 
tailed discussion of their solution, so that one may have at the 
outset a general conception of the nature of the whole problem. 

The Future Entrants and the Present Employees 

At the outset the point must be made that the problem has 
two branches which are in some ways entirely distinct, namely, 

(I) to devise an ideal permanent system to apply to those em- 
ployees who are to enter the service after its adoption and 

(II) to work out a satisfactory, temporary transitional system 
to apply to the present employees. The first branch of the 
problem is by far the more important and the following analy- 
sis has been prepared with the future entrants chiefly in mind. 
The questions that have to be considered in dealing with the 
present employees are of course in many ways the same, but 
they frequently have to be answered differently since the pres- 
ent employees are in several important respects not at all like 
the future entrants and the economic nature of the benefit to 
the two classes is radically different. A clear understanding 
of the problem as it affects future entrants will, however, give 
an excellent idea of the problem involved in dealing with pres- 
ent employees. 

The Contingencies Involved 

The English experience of the past century demonstrates 
very clearly, if demonstration be necessary, that once an em- 
ployee is in the service, he cannot go out of it nor pass from 
the pensioners' roll without directly involving the retirement 
system. The system will, moreover, be affected even if from 

39 



RETIREMENT OF PUBLIC EMPLOYEES 

some cause other than accident, disease, or advancing age he 
becomes inefficient, or if the work which he has been doing 
ceases to be required by the government, because, in the event 
of the happening of one of these contingencies, the tendency 
of the administrative officers will be to attempt to eliminate 
the employee from the active service by the avenue of the 
retirement system. The accident or disease which causes dis- 
ability or death may, of course, result from ordinary natural 
causes, or it may be the direct result of the actual performance 
of duty. The contingencies in the life of the employee which 
are of concern in establishing a retirement system may then 
be summarized as follows, in the order of their importance 
to the system : 

1. Superannuation, or failure of efficiency due to ad- 

vancing age. 

2. Disability, or failure of efficiency in the early years of 

life due to accident or disease. The accident or dis- 
ease may be due 

(a) To ordinary causes, 

(b) To the actual performance of duty. 

3. Withdrawal from the service : 

(a) By voluntary resignation, 

(b) By dismissal. 

4. Death in the active service. Death may be due 

(a) To ordinary causes, 

(b) To the actual performance of duty. 

5. Death after retirement : 

(a) On superannuation benefit, 

(b) On disability benefit, the disability being due 

I. To ordinary causes, 
II. To the actual performance of duty. 

6. Loss of efficiency while in active sendee not due to ac- 

cident, disease or advancing age. 

7. Loss of usefulness because of changed demands in the 

public service. 

40 



PROBLEM OF DEVISING RETIREMENT SYSTEM 

Shall a Benefit Be Granted? 

The first question which the f ramers of a retirement system 
have to consider under each of those contingencies is "What 
is the proper course to pursue in the event of the happening 
of this contingency; shall a benefit be granted or not?" A 
benefit in event of loss of ability through advancing age is 
the foundation of a system, and hence the question of the de- 
sirability of such a benefit is identical with the question of 
the desirability of any system at all ; and the same may be said, 
possibly with some reservation, regarding a benefit in event 
of early disability from ordinary accidents or disease, as dis- 
tinguished from service accidents or disease. Each of the 
other contingencies presents its own distinct question. In the 
case of death or disability resulting directly from the actual 
performance of duty, the question is mainly administrative, 
whether such cases can best be treated under the retirement 
system or in some other way; whereas in the case of the other 
contingencies, it is one of desirability from the point of view 
of the government, the employees, and the public; and possi- 
bly, also, to a certain extent, it is one of feasibility. 

Upon What Conditions? 

If it is decided to include a benefit in event of the happening 
of a given contingency, the next step in considering that con- 
tingency is to settle upon the conditions under which the benefit 
shall be allowed. Certain of the contingencies, such, for ex- 
ample, as resignation, dismissal and death, involve events that 
are naturally clearly defined, and hence the work of establish- 
ing the conditions precedent for the granting of a benefit is 
comparatively simple. Superannuation and ordinary disabil- 
ity, the two fundamental contingencies, on the other hand, 
are generally conditions of slow development, not clearly de- 
fined. To establish proper conditions to govern the awarding 
of these benefits is therefore a problem of first importance. 

4i 



RETIREMENT OF PUBLIC EMPLOYEES 

The Superannuation Benefit. Analysis of the conditions 
upon which superannuation systems are, or have been, operat- 
ed, indicates that the following points must be taken into con- 
sideration. 

i. Shall the granting of a benefit rest in the discretion 
of the administrators of the government, or shall certain con- 
ditions be established upon the fulfillment of which the em- 
ployee shall be entitled to retire with a benefit as an established 
right ? 

2. Shall the system provide a benefit only, and leave the 
decision regarding retirement to the discretion of the employee 
or his administrative superior, or shall it establish certain age 
or service limitations upon the attainment of which the em- 
ployee is compelled to retire ? 

3. If compulsory retirement is necessary to make the sys- 
tem meet the needs of the government, shall a uniform fixed 
age or service limitation be established, upon fulfilling which 
all shall retire; or shall certain minimum conditions be estab- 
lished, upon fulfilling which retirement is permissive, and 
above them certain maximum conditions, upon fulfilling which 
it is compulsory? 

4. Shall any such conditions be based on length of service 
alone, on age alone, or on both length of service and age? 

5. What shall be the exact age condition established, or 
if a service condition is deemed imperative to meet some pe- 
culiar need of the particular branch of the government to 
which the system is to apply, what shall be the exact service 
limitations introduced ? 

6. Have the conditions settled upon been narrowly con- 
ceived in the interests of a particular branch of the public 
service or its employees, or have they been adopted with a view 
to protecting the interests of society as a whole so that its 
productive force will not be unnecessarily diminished, and 
so that no body of subsidized competitors will be introduced 
into the labor market in late middle life? 

The question of providing for a regular system of trans- 

42 



PROBLEM OF DEVISING RETIREMENT SYSTEM 

fers from an athletic branch of the service to a sedentary 
branch is one worthy of careful investigation, as it may be the 
solution of keeping such branches of the government as the 
police department and the fire department in a high state of 
efficiency without turning out into the labor market a group 
of pensioners of comparatively early age. 

The Disability Benefit. In determining upon the conditions 
precedent to the granting of an ordinary disability benefit the 
following are the principal questions to consider : 

i. What shall constitute disability within the meaning of 
the law ? Must it be 

a. Permanent? If the decision is that disability must be 
apparently permanent at the time of retirement, how shall 
cases of temporary disability be treated? Shall a sickness 
insurance system be developed, or shall the sick-leave privi- 
leges be sufficiently extended to give the protection required 
to make the entire system adequate? 

b. Total, or if only partial, must it disqualify for all 
government positions or only for the position the employee 
has been filling? 

c. Due to accident or disease? 

2. How shall the facts be established and the system pro- 
tected against the obvious danger of fraud? 

a. If by medical examination of the applicant, 

I. Who shall choose the examining physician? 
II. Shall the examination be made once or peri- 
odically? 
III. Shall the right be retained to make an ex- 
amination at any time? 

b. Shall the application for retirement originate with the 
employee or with his administrative superior? 

c. Shall the allowance be granted for life, subject to can- 
cellation, or shall it be granted for periods, subject to 
renewal ? 

43 



RETIREMENT OF PUBLIC EMPLOYEES 

3. Shall the right to an allowance in event of disability 
accrue immediately upon entering the service or shall a cer- 
tain minimum period of service be required? If the right 
accrues immediately, shall adequate provisions be included in 
the law for a medical examination of all appointees? 

What Amount and How Determined? 

Determining the amount of the benefit to be provided con- 
stitutes another fundamental problem that has to be consid- 
ered in connection with each of the contingencies upon the 
happening of which an allowance is to be paid. 

The Superannuation Benefit. To settle upon a proper basis 
for determining the amount of the superannuation benefit is 
perhaps the most complex question the founders of a retire- 
ment system have to face. It can be simplified somewhat by 
dividing it into three parts, though the parts to a certain ex- 
tent overlap. They are as follows : 

1. What shall be the relation between the amount of the 
employee's superannuation benefit, and the amount of his 
salary ? 

2. What shall be the relation between the amount of his 
benefit and the length of his service? 

3. What shall be the relation between the amount of his 
benefit and the economic need of himself and his dependents ? 

In considering the relation between benefit and salary, the 
founders have to choose between three broad classes of sys- 
tems: 

a. Those in which the benefit is entirely independent of 
salary, 

b. Those in which it is directly dependent on salary, and 

c. Those in which it is indirectly dependent on salary, 
independent Of principal importance among the schemes granting bene- 

a ary fits entirely independent of salary are : 

I. Those paying a sum fixed in the discretion of the 
grantors, 

44 



PROBLEM OF DEVISING RETIREMENT SYSTEM 

II. Those paying a fixed sum alike for all, and 
III. Those paying such an annuity as the accumulations 
from a fixed uniform regular contribution depos- 
ited at stated periods will purchase at retirement. 

The applicability of the second and third of these to the 
service in question has to be considered. 

If the service to be covered by the retirement system is not Directly or 
homogeneous and includes many different classes of employees ^pendent 
receiving widely different rates of pay, the founders of the on Salary 
system will doubtless deem it expedient to introduce some re- 
lationship between the amount of the benefit and the amount 
of salary. They will then face the difficult question of 
whether they shall make that relationship direct or indirect. 
If it is to be direct, the employee will be promised that on re- 
tirement he will be paid a certain proportion of his salary, gen- 
erally a certain fraction (say one-sixtieth for illustration) for 
each year of service. The salary used as the basis for the cal- 
culation may be that which he is earning at the time of retire- 
ment — the terminal salary, as it is called, or one of its variants, 
for example, the average of the last few years, or it may be 
the average throughout service. On the other hand, he may 
not be promised any fixed proportion of his salary as a re- 
tirement allowance, but he may be required to set aside regu- 
larly at fixed times, say on pay days, — or the government may 
be required to set aside on his behalf at fixed times, — a cer- 
tain proportion of this salary, and these contributions may be 
accumulated at compound interest to purchase for him on re- 
tirement an annuity, or they may be used immediately for 
the purchase of a deferred annuity payable at the retirement 
age. The amount of the annuity will depend on the amount 
of the accumulation standing to his credit, or on the amount 
of the contribution. This system may be so arranged that 
the employee who conforms to the average receives exactly 
what would have been granted under the direct system; but 
the benefits will vary in cases which do not conform to the 

45 



RETIREMENT OF PUBLIC EMPLOYEES 



The Salary 
Scale 



average. The systems basing benefits directly on salary are 
highly collective, and are spoken of as involving equality of 
sacrifice, because each employee with the same length of serv- 
ice on retirement foregoes, under the terminal salary plan, 
exactly the same proportion of his active pay and, under the 
other variants, approximately the same proportion. The sys- 
tems giving benefits based indirectly on salary, in which the 
amount depends on contributions, or the accumulation from 
contributions, proportional to salary, are far more indi- 
vidualistic and are spoken of as giving equality of return, be- 
cause each employee gets the same value for his contributions 
or the contributions made in his behalf. 

If benefits are directly related to salary, and if the system 
is to be scientifically managed on the actuarial reserve basis, 
the salary scale enters into the very framework of the whole 
structure. The salary scale is based on averages and makes 
two assumptions : ( I ) that the future rate of advancement in 
salary can be foretold from the rate of advancement among 
present employees, or the employees of the immediate past, 
and (2) that it is reasonably fair to assume average advance- 
ment for all employees. A system making benefits indirectly 
dependent on salary can be developed without the use of the 
salary scale; and if one is used to give closer relationship be- 
tween benefit and final salary, its use does not affect the finan- 
cial solvency of the fund, nor does it affect the equities as 
between employees, because each gets precisely what his own 
contributions or the contributions made in his behalf will pur- 
chase, and is promised no more. The ultimate decision be- 
tween these two types of systems will, therefore, turn pri- 
marily on the weight which the founders of the retirement 
system attach to the four arguments against the use of the 
salary scale. They are as follows : 



Objections 

to Salary- 
Scale 



1. It introduces an unstable element into the system. 

2. It interferes with administrative changes. 

3. Under a contributory system it introduces an element 

46 



PROBLEM OF DEVISING RETIREMENT SYSTEM 

of unfairness as between classes of employees, and 
as between individual employees of the same class. 
4. Under a contributory system, it necessitates changes in 
the rates of contribution from time to time. 

When this most important decision has been made, the de- Degree of 

., ,. , * ..... ,- 1 1 Relationship 

tails regarding the degree of relationship to final salary can 
be perfected. Under the direct relationship system the ques- 
tion becomes whether the terminal salary shall be used, or the 
average during the last few years, or the average throughout 
service. Under the indirect relationship system the question 
is how close a connection is desirable and what is the most 
feasible means of securing it. 

In considering the relationship between length of service Relation to 
and the amount of the superannuation benefit, the first question S g"^ ce ° 
is naturally whether any such relationship is desirable. Since 
for many branches of the public service the arguments for a 
relationship are overwhelming, the question quickly becomes, 
How shall a relationship be established? If the amount of 
the benefit depends on the accumulation from contributions 
made by or in behalf of the individual employee, a relation- 
ship is inherent in the system itself, and its exact amount is 
determined by such factors as the rate of interest earned by 
the contributions, the age at retirement, and the rate of mor- 
tality among the superannuation annuitants. Under other 
systems the degree of relationship is more largely within the 
control of the founders of the system ; and except as they are 
restrained by cost, they can establish such a scale as seems 
desirable in the light of the experience of other funds with 
scales. 

The amount of the superannuation benefit in relation to the Relation to 
economic need of the employee and his dependents can be con- ^° n ° mic 
veniently considered under four heads : 

1. An amount in aid of subsistence, 

2. The minimum of subsistence for the employee : 

47 



RETIREMENT OF PUBLIC EMPLOYEES 

a. As an individual, 

b. As the head of a family. 

3. The amount which will give the employee the neces- 

saries of his standard life, and 

4. The amount which will involve little sacrifice upon re- 

tirement. 

The founders of the system must decide which of these 
classes embraces the benefit that should be paid in the average 
or typical case. When this has been settled upon, the exact 
amount can be determined and decisions can be reached on 
the procedure to follow in dealing with the more exceptional 
cases. 

The Disability Benefit. The amount of the benefit in event 
of disability from ordinary causes involves the same three 
broad questions, relationship to (1) salary, (2) service, and 
(3) economic need. Some important differences between the 
two should, however, be noted. 

Basing the amount of the disability benefit on the accumula- 
tions from contributions is impracticable, as the sum available 
in case of early disaster is not sufficient to be of any real util- 
ity. The disability benefit must be on a collective or insurance 
basis under which the contributions by or in behalf of the 
employees who escape disability are used to pay the annuities 
to the unfortunates who do not. In a system providing for a 
high degree of collectivism, the disability benefit may be based 
on one of the forms of salary; and if the system is operated 
on the actuarial reserve plan, the salary scale will be required. 
The objections to its use in this instance are essentially the 
same as in the case of the superannuation benefit. If the ideal 
of the founders is to provide equality of return, so that the 
dollar paid by or in behalf of one member will buy as much 
protection as that paid by or in behalf of another, a device 
giving equality of return can be developed. Correlating the 
sum thus provided for the disabled employee with the amount 
to his credit under the superannuation branch of the retire- 

48 



PROBLEM OF DEVISING RETIREMENT SYSTEM 

ment system then becomes a question for careful considera- 
tion. 

The relationship between length of service and the amount 
of the ordinary disability benefit presents its own peculiar 
problem. The difficulty on the one hand is to offer a sufficient 
sum from the outset so that the disabled employee will not 
become dependent on charity, and yet not to get it so large 
or increase it so rapidly that it becomes an inducement for 
fraudulent retirements. As the twilight zone immediately 
preceding the superannuation retirement age is reached, the 
question becomes whether the amount available in event of 
disability should not increase fairly rapidly, so that at the 
superannuation age the two benefits merge without any very 
broad step between them. 

The danger of fraudulent disability retirements likewise 
must be taken into consideration in dealing with the amount 
of the benefit, and the economic need of the employees. Until 
fraud can be eliminated, it seems hardly safe to pay the benefits 
which might seem desirable if the system were dealing only 
with genuine disability. 

Disability Due to Performance of Duty. If disability di- 
rectly due to the actual performance of duty is to be covered 
by the retirement system, the whole question of the amount 
of the benefit has to be reexamined for that contingency, be- 
cause the responsibility of the government in event of a serv- 
ice accident, or a service disease, is entirely different from its 
responsibility in case of ordinary disability. The objection 
to benefits based directly on salary are far less applicable, if 
applicable at all, and there is more ground for taking into 
consideration the employee's dependents. Cases of partial 
disability from service accidents or disease demand considera- 
tion, even if the beneficiary is subsequently employed in an 
inferior position under the government that pays a living 
wage. The correlation of this benefit with the others under 
the system also presents some nice points for decision. 

49 



RETIREMENT OF PUBLIC EMPLOYEES 

The Withdrawal Benefit. The amount of the benefit on 
withdrawal, whether by resignation or dismissal, is generally 
a comparatively simple question, because the maximum advo- 
cated is the return of all contributions made by or in behalf 
of the employee with compound interest or their equivalent. 
That something less than this full return is fair, if the em- 
ployee already has received some advantage from the system 
in the form of protection in case of early death or disability, 
scarcely admits of argument, and some may question the ex- 
pediency of a complete return. 

Benefit in Event of Death in Active Service: Ordinary 
Causes. In case of death in the active service from ordinary 
causes, the minimum benefit must in all probability be the re- 
turn of the contributions made by or in behalf of the employee 
with compound interest or their equivalent, but a serious ques- 
tion will undoubtedly arise as to whether this is the best form 
for the benefit to take. Strong arguments will naturally be 
advanced tending to show the necessity for the establishment 
of a widows' and orphans' fund. The prima facie case for 
such a benefit has to be critically examined and its merits have 
to be contrasted with the far more flexible, special life-insur- 
ance benefit of a lump sum to be paid as the employee may 
direct, since this benefit recognizes that scarcely any two em- 
ployees have exactly the same interest in a widows' and 
orphans' fund, and that the interest of any one employee in 
that fund is very different at different times in his life. The 
extent to which any special life insurance benefits shall be 
made compulsory also requires most careful consideration. A 
possible solution to be discussed is whether the system should 
not offer optional special insurance benefits to be purchased 
bv the employee as his judgment may direct. The merits of 
a life insurance benefit in stabilizing a fund operated on the 
actuarial reserve basis and in furnishing" the employees a 
chance to procure insurance without large costs for the col- 
lection of premiums should be considered. 

50 



PROBLEM OF DEVISING RETIREMENT SYSTEM 

From Causes Arising in Performance of Duty. If death re- 
sulted from the actual performance of duty, the responsibility 
of the government is again so different from its responsibility 
in the case of an ordinary death, that the question of the 
amount of the benefit must be reexamined. The objections 
to a widows' and orphans' benefit are no longer applicable, for 
the equitable division of the cost among the employees ceases 
to be an important factor for consideration. For the same 
reason benefits based on salary are not objectionable as a 
means of providing for this contingency. 

The legislation establishing the system should probably es- 
tablish classes of dependents who shall be recognized as en- 
titled to benefits. If a special benefit in event of death follow- 
ing a retirement because of disability incurred in the actual per- 
formance of duty is desired, essentially the same points have 
to be considered in establishing it. 

Death After Retirement. The question of the amount of 
the benefit to be paid in event of death after retirement on a 
superannuation benefit, or on an ordinary disability benefit, 
is in many ways similar to that regarding the amount in case 
of death in the active service from ordinary causes. The de- 
mand from some services for a widows' and orphans' benefit 
will doubtless arise, but again the question has to be faced 
whether such a provision is not inflexible and more or less 
inequitable as between different classes of employees. The 
problem will doubtless become one of how to substitute some 
device which is equitable as between different employees and 
at the same time sufficiently flexible to permit each man to pro- 
vide for his own needs. To meet these requirements the de- 
vice of optional settlements at the time of retirement has to be 
considered, whereby a man with no one but himself to provide 
for can select an annuity for his own life; the man with him- 
self and wife to take care of, a smaller annuity of the same 
cost payable to himself or his wife so long as either of them 
shall survive ; and the man with children not yet, say, eighteen, 

5i 



RETIREMENT OF PUBLIC EMPLOYEES 

an equivalent annuity payable so long as he shall live, or if he 
should die before his youngest child is eighteen, — or any other 
age that may be selected, — until the child shall reach that age. 
Such devices are both equitable and flexible. 

The Cost of the Benefit 

Three major questions have thus far been presented, (i) 
the advisability of granting a benefit in event of the happen- 
ing of the given contingency, (2) the conditions upon which 
the benefit shall be allowed in case one is granted, and (3) the 
amount of the benefit to be allowed, a question which in sev- 
eral instances, as has been noted, can be conveniently divided 
into three parts, (a) as related to salary, (b) as related to 
length of service, and (c) as related to economic need. An 
important, and at times, a controlling factor, in the decision of 
each of these questions is that of cost. A question which 
should be asked regarding each point under consideration is, 
"What will be the effect of the various possible procedures 
on the cost of the system?" The precise effect can, of course, 
be determined only by the experienced actuary after a search- 
ing examination of all the existing facts and a fairly elaborate 
tabulation of available data; and before any plan is definitely 
adopted the persons responsible for it should have before them 
practically exact cost figures prepared by an actuary experi- 
enced in dealing with retirement systems. The laymen charged 
with the responsibility of developing a retirement system must, 
however, keep clearly in mind at all times the general influ- 
ence which a given procedure will exert on cost. 

Number of Benefits and Cost. The relationship between 
the number of benefits granted and the cost of the system is, 
of course, manifest. A system which gives the employee all- 
round protection against the principal dangers of life must, 
of necessity, cost more than one which gives him merely rea- 
sonable protection against declining ability due to advancing 

52 



PROBLEM OF DEVISING RETIREMENT SYSTEM 

years. Against every benefit, except that in event of superan- 
nuation and possibly that of disability, the objection has to 
be considered that the inclusion of such a benefit will increase 
the cost. The issue becomes, therefore, whether the benefit 
is of sufficient value to the government, the employees or the 
public to warrant including it and increasing the cost in a com- 
pulsory system. If the decision is against including the benefit 
in a compulsory system, the possibility of offering, in event of 
that contingency, an optional benefit, to be paid for by the em- 
ployee, merits full examination. 

Conditions Upon Which Granted, and Cost. The factor of 
cost is of almost controlling importance in determining the 
conditions upon which the benefit should be granted. In deal- 
ing with a superannuation benefit, the significant point is that 
the younger an employee is on retirement, the larger will be 
the number of years he will live as a pensioner or an annuitant, 
and hence the more annuity payments he will receive, and the 
more his retirement will cost. When the cost of the annuity 
is distributed over the years of active service in the form of 
annual premiums or contributions to provide for superan- 
nuation retirement, a difference in the age fixed for retire- 
ment will be found to be even more striking, because if the 
age is high, a small cost is distributed over many years of 
active service, thus giving a small premium, whereas if the 
age is low, a large cost is distributed over relatively few years 
of active service, giving a high premium. The interest earned 
by accumulating premiums tends further to accentuate the 
difference, for money at compound interest a long time earns 
far more total interest, in proportion to the time on deposit, 
than money at interest a short time. Any condition, therefore, 
that permits an employee to get on the superannuation retire- 
ment list while still comparatively young is enormously ex- 
pensive, and the cost of any superannuation system proposed 
can be materially reduced by a tightening of the conditions. 

In the case of disability benefits, the factor of fraud exerts 

53 



RETIREMENT OF PUBLIC EMPLOYEES 

a strong influence on cost. If the legislation adopted provides 
for and secures (i) thorough independent medical examina- 
tions made periodically, (2) grants for fixed times and not 
for life, and (3) at least partial payments by the employees, 
it will tend to prevent fraud. Those retired as disabled will 
then be, in fact, genuinely disabled, and having impaired lives 
will, as a class, be short-lived. The cost of their annuities will 
be comparatively low. If, on the other hand, the system per- 
mits disability retirement on the certificate of the employee's 
physician, some employees will abuse the privilege. Their 
lives will not be genuinely impaired, and, as a class, they may 
live fully as long as their more honest fellow employees who 
stay in harness, paying high premiums for disability insurance 
necessary to cover the cost of fraud. 

The Amount of Benefit and Cost. The amount of the bene- 
fits to be allowed must, of course, be determined ultimately 
on cost, on a nice balancing of the relative merits of present 
consumption and enjoyment against provision for future con- 
tingencies. Here it becomes necessary to consider the develop- 
ment of the family responsibilities of the average man; and 
care must be exercised lest in providing for him and his wife 
in their declining years too great a proportion of his earnings 
are withheld from consumption in those important active 
years, when he and his wife are performing the fundamental 
social duty of rearing their children and educating them for 
effective lives. The needs of old persons must be considered 
in fixing the amount of the superannuation allowance. In 
dealing with the amount of the disability benefit some care 
must be exercised lest cost be allowed to play too great an 
influence. The nice problem in arranging a disability allow- 
ance is to prevent fraud, and at the same time to give in the 
cases of genuine disability an allowance which will be of real 
social utility. 

Equities Between Individual Employees and Cost. The 
equities as between individual employees constitute a question 

54 



PROBLEM OF DEVISING RETIREMENT SYSTEM 

which is becoming of increasing importance in the develop- 
ment of retirement systems, as the benefits under them are 
being more and more clearly recognized as parts of the em- 
ployee's compensation for services rendered. Respect for 
these equities becomes of special moment, if any of the cost 
is borne directly by the employees; but even if it is not so 
borne, and the government gives free pensions, it is in the pres- 
ent day a fair question whether the amount of pension given 
an employee should not bear some fairly definite relation to 
its cost and whether its cost in turn should not bear some fairly 
definite relation to his immediate wage. If two men are doing 
exactly the same work at exactly the same immediate wage, 
with equal efficiency, it may be doubted whether the govern- 
ment should spend far more for the pensioning of one than 
it spends for the pensioning of the other, especially when it is 
recalled that the differences in the cost of pensions may be 
due to differences between the employees which are mainly 
personal. If the employees are required to contribute to the 
cost, the issue becomes more sharply defined ; and the persons 
establishing the system have to ask whether they are justified 
in forcing one class of employees to pay part of the cost of 
retiring another. 

Age at Entrance, Sex, Occupation and Cost. Recognition Age at 
of the equities as between individual employees and as be- 3^™"" 
tween different classes of employees requires that the effect 
of age at entrance into the service, sex, and occupation, as 
influencing cost, be given attention. If all employees are to 
retire at sixty-five, on a uniform flat pension of say $400, the 
cost of that pension per year of service rendered the govern- 
ment by the employee retired will depend largely on how old 
the employee was when he entered the service. The cost, 
stated in the terms of an annual premium payable throughout 
active service, will be little in the case of the employee who 
has given his whole life to the government, whereas it will 
be enormous in the case of the man improvidently appointed 

55 



Cost 



RETIREMENT OF PUBLIC EMPLOYEES 

when already near the age of retirement Even if the govern- 
ment gives free pensions, it is doubtful if the public wants to 
do more for the man who has served it only a few hours than 
it does for the man who has labored for it during the heat 
of the day. If, in a system providing retirement at a fixed 
age, the employees bear the entire cost and all pay a uniform 
premium, the government is forcing the young entrant to pay 
the cost of its own laxity in permitting the appointment of a 
man already advanced in years. If a fixed period of service is 
required alike for all, and if all are charged the same premium, 
the older entrant pays part of the cost of retiring the younger. 
The general effect of age at entrance must, therefore, be gen- 
erally understood in establishing a system. 

Sex and If the service includes many women attention must also be 

given to the physiological, psychological, and economic differ- 
ences between the sexes, which may occasion marked differ- 
ences in the cost of their retirement. The woman's equity in 
the system should always be respected in event of her with- 
drawal on marriage ; it would be entirely unfair for the male 
employees to derive a profit from the women who thus resign. 
On the other hand, if both men and women are to be retired 
on superannuation benefits at the same age, the annuities for 
the women will cost more than the annuities for the men, be- 
cause the women will have the greater expectation of life, and 
it would be unfair to require the men to contribute toward 
the extra cost of the women's annuities. A difference in the 
contribution rates for the two sexes would be even more neces- 
sary if different retirement ages for the two should be estab- 
lished, as is sometimes done. If any option regarding retire- 
ment is allowed, and if disability retirement is permitted, other 
marked differences between the sexes may be manifested, 
necessitating further differences in the rates. 

Occupation If the service covered by the system is complex, the legisla- 

tion may have to provide for division into occupational or 
service groups, with different conditions for each group, and 
thus differences in cost will arise. Sometimes even if the gen- 

56 



and Cost 



PROBLEM OF DEVISING RETIREMENT SYSTEM 

eral conditions governing retirement are the same, the different 
branches of the service may be so dissimilar that equity will 
require differences in the rates. Whenever, therefore, a serv- 
ice includes many different occupations, or has many women 
employees, or receives new entrants at widely varying ages the 
question of equity as between individual employees in respect 
to the cost of the system becomes a matter for thorough ex- 
amination. 

Division of Cost Between Government and Employees 

Exaggeration of the Importance of the Issue. The division 
of the cost of the system between the government and the em- 
ployees as a class constitutes probably the most bitterly con- 
tested question which the framers of a retirement system have 
to face. It is the familiar issue of the contributory vs. the 
non-contributory system; and unfortunately it has assumed 
undue prominence in the consideration of retirement legisla- 
tion, because it is of great importance to employees already in 
the service. To them a wholly non-contributory system means 
an increase in total ultimate wages, whereas a contributory 
system, not carrying with it an offsetting increase in wages, 
means a deferment in the payment of a part of the wages 
which they have been receiving, and on which their existing 
standard of living is based. Such an issue is necessarily con- 
tentious; and the fact that it must inevitably arise in dealing 
with present employees is one of the reasons, though by no 
means the only one, for leaving present employees out of con- 
sideration in developing a system in the first instance. After 
an adequate, permanent, all-round system has been perfected, 
applicable to new entrants and possibly to such of the younger 
present employees as elect to come under it, then a temporary 
system can be devised for the present employees that will deal 
justly with them without impairing the utility of the perma- 
nent system. When the system for present employees is dis- 
cussed the difference between them and future entrants in 
respect to their requirements, their equities and their ability 

57 



RETIREMENT OF PUBLIC EMPLOYEES 

to pay contributions must be recognized clearly, and then the 
decisions must be reached as to how far these differences can 
be allowed for by changing the contingencies covered, the con- 
ditions upon which benefits are granted, the amount of the 
benefits, and the basis of division of cost between the govern- 
ment and its employees. To reach a sound conclusion re- 
garding the true merits of the controversy, contributory vs. 
non-contributory systems, the question must, however, be 
regarded from the point of view of employees who enter the 
service after the system has been established. 

Method of Determining Real Significance. The real signifi- 
cance of the issue is not to be found by contrasting systems 
which are non-contributory with systems that are contribu- 
tory, and explaining all the differences by the fact that one 
class has contributions, whereas the other has none. The 
essential point to determine is what the inclusion or exclusion 
of a contributory feature makes inevitable. Does the fact that 
a system is non-contributory necessarily preclude the granting 
of any benefit that may be regarded as essential? Does the 
inclusion of a contributory feature necessitate the payment of 
a benefit that it is unwise to include under any system? Is 
the organization and management of the system necessarily 
dependent on the decision regarding contributions? Is the 
real incidence of the cost of benefits determined by the simple 
device of placing it on one party or the other in the law, or 
is it determined by fundamental economic forces? Is the 
moral stamina of the employees necessarily affected by a pub- 
lic demonstration that they bear the cost of their own retire- 
ment, or can they take what is commonly called a "free pen- 
sion" with no more moral danger than is encountered in taking 
their wages? Will the public and the members of the legis- 
lature recognize the true nature of the transaction as well 
under one system as the other? Under which is the greater 
danger that the employees may organize to demand increased 
benefits without giving any consideration to cost? These are 

58 



PROBLEM OF DEVISING RETIREMENT SYSTEM 

some of the more important points which the founders of a 
system have to consider in the more or less theoretical analy- 
sis necessary to reach a conclusion of the real, the ultimate, 
merits of the contributory and the non-contributory systems. 
After a theoretical decision regarding merits has been 
reached, the question of feasibility has to be considered. 
Can a contributory system be operated at a reasonable cost? 
If adequate records are kept regarding the operation of a non- 
contributory system, will the difference in cost between the 
two be material? Are the advantages of the contributory sys- 
tem sufficient to offset any increased expense of operation? . 

The Basis for Division 

If the final decision reached is that the employees should 
contribute toward the cost of their benefits, the next point for 
discussion is whether they should pay the whole cost or 
whether the government should pay part. This is the issue 
of the wholly contributory vs. the partially contributory sys- 
tems. Closely related to it is the question of indirect contribu- 
tions by the government; whether even under a wholly con- 
tributory system the government ought not to meet the ex- 
penses of managing the system, and should not guarantee a 
rate of interest and the financial solvency of the system. The 
division of cost in the past, under partly contributory systems, 
has apparently been based on expediency, but the question 
may be raised whether possibly a division according to the rel- 
ative interest of the government and of the employees in the 
benefits provided may not be possible. If optional benefits are 
granted, it may seem doubtful whether the government should 
share in their purchase. Again the issue must be faced 
whether the government should divide the cost on the selected 
basis (say, half and half) with each separate employee giving 
a larger proportion of his earnings for one than for another, 
or whether it should divide the cost in the agreed proportion 
only with the average or typical employee; and, having thus 
fixed what proportion of salary it will contribute, pay that 

59 



RETIREMENT OF PUBLIC EMPLOYEES 

same proportion for each employee. The employee himself 
would then make up whatever might be needed in his own par- 
ticular case. Employees who could get retirement benefits 
cheaply because of early entrance into the service, or some 
other personal factor, would not contribute so large a share 
of the total cost of their retirement as would those who, be- 
cause of later entrance or some other personal factor, could 
only get retirement benefits at great cost. For each of them 
the government would contribute the same proportion of 
salary. 

A guarantee of the interest rate and of the solvency of the 
fund are of importance chiefly if the fund is operated on the 
actuarial basis. 

The Actuarial Reserve Versus the Assessment System 

Description of the Two. The gravest problem of public 
finance involved in the establishment of a retirement system 
is whether it shall be operated on the actuarial reserve basis 
or on the assessment or cash disbursement basis. Under the 
pure assessment or cash disbursement plan, no fund is estab- 
lished, and all benefits are paid as they fall due from the cur- 
rent revenues of the government. If contributions are col- 
lected from the employees they are simply included as general 
revenues, and are immediately paid out. Under the actuarial 
reserve plan a fund is established, and at regular intervals, gen- 
erally on pay days, is turned over to the fund a sum which, 
broadly speaking, will be sufficient with the compound interest 
it will earn to pay for all the benefits which will ever fall due 
as the result of the service rendered during the period covered 
by the payment. All the money coming in on account of the 
retirement system is invested at interest, and all benefits are 
paid from the fund thus created. 

Three distinct differences between the two systems should 
be clearly recognized. 

( i ) Under the actuarial reserve plan the taxpayers who re- 

60 



PROBLEM OF DEVISING RETIREMENT SYSTEM 

ceive the service pay all the obligations incurred by the gov- 
ernment in respect to that service; whereas under the assess- 
ment or cash disbursement plan the taxpayers at the time the 
service is rendered pay the immediate wage and leave for some 
future taxpayers the payment of the prospective benefits which 
have accrued in respect to that service. Future taxpayers un- 
der the assessment or cash disbursement plan pay the imme- 
diate wage for the services rendered them, and the benefits 
which mature in their day in respect to services rendered a 
prior generation. Under a cash disbursement system the gen- 
eration establishing the system escapes with little or no pay- 
ment, and passes the burden to the future, whereas under the 
actuarial reserve system each generation pays its share. 

(2) Under the actuarial reserve system, the money avail- 
able for payments has come in part from taxes and in part 
from the interest earned by this money in the time between 
its collection and its disbursement, whereas under the assess- 
ment or cash disbursement plan, all the money comes directly 
from the taxes and no interest is earned, because practically 
no time elapses between the collection of the money and its 
disbursement. 

(3) Under the actuarial reserve plan the amount required 
from the taxpayers annually for the retirement system bears 
practically a fixed relationship to the sum raised for the imme- 
diate wage of those in the service, whereas under the assess- 
ment or cash disbursement plan the proportion between the 
amount required for retirement benefits and the amount re- 
quired for wages is for several generations a constantly in- 
creasing proportion. 

The founders of the system must clearly distinguish be- 
tween a genuine actuarial reserve, and a mere fund established 
on guess work. It takes more than a fund to make an actuarial 
reserve. The actuarial fund is so arranged that the payments 
will accumulate a reserve, which will be sufficient to pay all 
benefits on retirement. The problem of fixing the amount of 
such payment can only be solved by a properly qualified actu- 

61 



RETIREMENT OF PUBLIC EMPLOYEES 

ary. Almost innumerable precedents of mere retirement 
funds can be found, which have become insolvent through 
attempting to give benefits for less than benefits cost, but they 
should not be confused with genuine actuarial reserve sys- 
tems, which are more recent developments in retirement legis- 
lation and are scientifically planned. 

The Merits of the Two Contrasted. The merits of the as- 
sessment system must be considered : ( i ) That it is simple, 
and (2) that it is safe; and against them must be set its de- 
fects : 

1. It is unbusinesslike and conducive to extravagance; 

2. It is liable to popular misunderstanding and attack; 

3. It is inequitable as between successive generations of 
taxpayers ; 

4. It is not adaptable. 

In contrast with these must be considered the merits of the 
actuarial reserve system ; 

1. It is equitable as between successive generations of tax- 
payers ; 

2. It is businesslike; 

3. It is comparatively safe from popular misunderstand- 
ing and attack ; 

4. It is adaptable ; 

yet unless properly safeguarded in the legislation establishing 
it, possibly expensive and to a certain extent dangerous. 

Necessity for Actual Computations 

Even if for some reason of public policy the legislators 
adopt the doubtful expedient of operating the system, in whole 
or in part, on the assessment or cash disbursement plan, con- 
sideration of the merits of the actuarial reserve system should 
demonstrate the necessity for careful actuarial computations 
and the establishment of a so-called "paper fund," in which, 

62 



PROBLEM OF DEVISING RETIREMENT SYSTEM 

although no money is actually funded, all the computations 
are made as if it were. 

The laymen concerned in establishing a system cannot hope 
to become expert actuaries, but their work demands of them 
that they should have a general knowledge of the actuarial 
processes involved in the organization and management of 
a system on the actuarial reserve basis. They must appreciate 
the importance of collecting what might seem at first unneces- 
sarily elaborate data regarding the employees, and the tabula- 
tion of these data so that the actuary can be guided in select- 
ing the rates of probability needed to anticipate future develop- 
ments from a study of the experience of the past, and they 
must realize the absolute necessity of establishing an adequate 
system of records so that periodical examinations of the fund 
can be made by the actuaries cheaply to determine its actual 
condition and to make such changes as may be necessary to 
keep it in a permanent state of solvency. The legislation 
which is adopted should provide for a periodical actuarial 
examination of the system if its size does not justify the per- 
manent employment of an actuary. The question of how fre- 
quent these examinations shall be must, therefore, be settled. 

The Actuarial Deficit on Creation of System 
The method to be followed in meeting the actuarial deficit 
which exists at the establishment of any system that attempts 
to provide benefits to employees already in the service, in re- 
spect to their period of employment prior to the establishment 
of the system, will demand careful study, as it is in itself a 
fairly intricate problem of public finance. 

Systems for Small Services 

In some cases the persons seeking the establishment of a 
retirement system will realize that the number of employees 
involved is not sufficiently great to permit of the operation 
of a system on the actuarial reserve basis, and yet they will 
wisely hesitate to attempt to pay retirement benefits out of 

63 



RETIREMENT OF PUBLIC EMPLOYEES 

current revenues. Their task is to get some central agency, 
such as the State, to serve as an insurance carrier for their 
employees and those of other similar units on some basis that 
will be equitable as between communities, as well as between 
employees. Failing in that they have to see how far they can 
develop a makeshift system through the use of insurance and 
annuities purchased from private companies. 

Bad Financial Practices 

Attention also has to be given to the matter of raising funds 
and to the danger of making for the retirement fund a perma- 
nent appropriation of the revenues from any particular source. 
To a peculiar degree the operation of a retirement system 
requires a watchfulness which can only be secured by having 
the whole appropriation necessary to meet its cost one clear- 
cut item in the appropriation act, so that the public can readily 
determine what the retirements are costing. 

Protecting System from Financial Indiscretion of Employees 
One subject for determination, comparatively simple in it- 
self, is really of great importance to the public, namely, how 
to make sure that, after all the machinery has been established 
and has done its work, the employee may not, by losing his 
accumulation through financial indiscretion, destroy all the 
good accomplished. In this connection also the founders of 
the system have to consider how far it is wise to go in permit- 
ting the employees to borrow from the fund. One proposal, 
almost invariably, is that they be permitted to borrow their re- 
serve in cases of emergency, with no special security, whereas 
another is that they may borrow on adequate security at the 
rate of interest the fund is earning. According to this second 
scheme, the fund could purchase first mortgages on the prop- 
erty of its members at the rate of interest which the fund is 
then getting on its current investments, thus enabling such 
employees as may so desire to become owners of their own 
dwellings or other property. 

64 



PROBLEM OF DEVISING RETIREMENT SYSTEM 

The Arrangement of the Detailed Discussion 

The questions which have been briefly mentioned in the pre- 
ceding pages of this chapter have perhaps been sufficiently 
numerous to indicate in a general way the nature of the prob- 
lem which confronts persons who attempt to develop, or to 
assist in developing, a retirement system for public employees. 
The remaining chapters of this book are devoted to a more 
detailed examination and discussion of these questions and of 
some others of probably lesser importance. In this brief analy- 
sis what has seemed to be the logical order of development 
has been followed, and the contentious question of contribu- 
tions has been allowed to take its orderly place as a problem 
of financing the system. In the detailed discussion the two 
chapters dealing with contributions are placed first, so that 
what appears to be an exaggerated issue, at least as far as 
future entrants are concerned, may be carefully examined at 
the outset, thereby clearing the field for the consideration of 
the more vital issues, the benefits to be granted, the condi- 
tions upon which they are to be granted, their amount, and 
how it is to be determined, and how the whole system is to be 
financed, so that the benefits expected shall be actually realized. 

Attention should perhaps be called to the fact that in dis- 
cussing such questions as the equities between individual em- 
ployees, a wholly contributory system is frequently assumed, 
though so far as is known one is nowhere in actual operation. 
Without now discussing any other merits which a wholly con- 
tributory system may possess, it is a wonderful instrument to 
use in analyzing a complex situation. One can say, "Assume 
a wholly contributory system," and at once a question like that 
of equities becomes clearer, especially if one accepts the doc- 
trine that retirement benefits are part of wages and that eco- 
nomic forces tend inevitably to place the burden on the em- 
ployees, whether the system be contributory or non-contribu- 
tory. 

In the detailed discussion in the following pages, each of the 

65 



RETIREMENT OF PUBLIC EMPLOYEES 

more important contingencies has been made a chapter under 
which the various questions up to, but not including, the 
financing of the entire system, are discussed. In the case of 
disability, however, a single chapter covers both the ordinary 
type and that occasioned by the actual performance of duty. 

The order in which the subsequent chapters appear is given 
below, and from the preceding analysis one can tell fairly well 
the ground covered under each. The exact scope of each is, 
of course, given in the table of contents. 



CHAPTER TITLE 

III. The Contributory vs. the Non-Contributory System. 

IV. The Wholly vs. the Partly Contributory System, and the 

Indirect Contributions of the Government. 
V. The Superannuation or Service Benefit. 
VI. The Disability Benefit. 
VII. The Benefit on Withdrawal from the Active Service, 

Whether by Resignation or Dismissal. 
VIII. The Benefit in Event of Death in the Active Service, Death 
Not Caused by the Actual Performance of Duty. 
IX. The Benefit in Event of Death in the Active Service, Death 

the Direct Result of the Actual Performance of Duty. 
X. The Benefit in Event of Death After Retirement. 
XI. The Employee Who Becomes Inefficient from Causes Other 

Than Accident, Disease or Old Age. 
XII. A Benefit in Event of the Abolition of Position or Reor- 
ganization of Office. 

XIII. The Present Employees. 

XIV. The Actuarial Reserve Plan vs. the Assessment or Cash 

Disbursement Plan. 
XV. The Establishment and Operation of a Retirement System 

on the Actuarial Reserve Plan Generally Described. 
XVI. The Actuarial Deficit Created When a New System Prom- 
ises Benefits to Present Employees for Past Service. 
XVII. Systems too Small to be Operated on an Actuarial Reserve 

Basis. 
XVIII. Certain Common Practices in Financing a Fund That Are 
Objectionable. 
XIX. Protecting the Public from Financial Indiscretion of Re- 
tired Employees. 
XX. Conclusions. 



CHAPTER III 

THE CONTRIBUTORY VS. THE NON-CONTRIBU- 
TORY SYSTEMS 

The Nature of the Question. Definition. Benefits not Necessarily 
Affected. Financial Basis not Necessarily Affected. Cost of Bene- 
fits Not Affected. Economically Unimportant to New Employees. Of 
Moral or Psychological Importance Mainly. Contributory System 
More Flexible. Four Principal Objections to Contributions. Fail- 
ure in English Civil Service. Against Interests of Government. 
Against Interests of Employees. Expensive to Administer. Sum- 
mary. 

The Nature of the Question 

Definition. Probably the most warmly debated question 
that arises in the establishment of a retirement system is 
whether the government shall pay all the costs of the benefits 
or whether the costs shall be borne in whole or in part by the 
employees. If the government pays all the costs, the system 
is technically referred to as "non-contributory," and popularly 
it is called a "straight" pension scheme or a "free" pension 
scheme. If the employees pay something towards the costs, 
the system is referred to as contributory. Contributory sys- 
tems may be wholly contributory, if the employees pay for 
all the benefits, or partially contributory, if the employees pay 
part and the government part. 

The exact bounds of the question, contributory vs. non- 
contributory systems, as indicated by these definitions, have at 
times been obscured by the arguments ; and points have been 
drawn in as necessary parts of this question which as a mat- 
ter of fact are not involved at all from a theoretical stand- 
point. 

Benefits Not Necessarily Affected. The payment of a bene- 
fit in event of resignation or dismissal, or in event of death 

6 7 



RETIREMENT OF PUBLIC EMPLOYEES 

in the active service or in the early years after retirement, has, 
for example, been regarded at times as the essence of a con- 
tributory system, but no inherent quality of the non-contribu- 
tory system prevents the inclusion of such benefits under that 
type of organization. Such benefits are of interest primarily 
to the employees and their dependents ; and consequently they 
have been more generally recognized under contributory sys- 
tems because the employees, paying part of the cost, were in 
a position to demand them ; but that they can and will secure 
them under the non-contributory system is the experience of 
the British civil service. The most recent change in the non- 
contributory system for these employees has been the intro- 
duction of a benefit in the event of death or resignation. 1 

1 An act to amend the superannuation acts, 1834 to 1892 (20 Sep- 
tember, 1909). The acts relating to the English system have been 
reprinted in "Civil Service Retirement in Great Britain and New Zea- 
land by Herbert D. Brown, Senate Document, No. 290, 61st Congress, 
2d Session. Reprinted as Appendix B of the Report of the Commis- 
sion on Economy and Efficiency on "Retirement from the Classified 
Civil Service of Superannuated Employees," House Document 732, 
62d Congress, 2d Sessions, Washington, 1912. 

Mr. H. W. Manly in the Journal of the Institute of Actuaries, Vol. 
36, p. 215, points out vividly how under a partly contributory system 
the employees will seek benefits under all contingencies. He seems 
to infer that the same situation would not arise under a non-con- 
tributory system. His conclusions were probably based on his experi- 
ence with private commercial organizations. The soundness of his 
conclusion for commercial systems may be questioned, and so far as 
the public service is concerned, they are contrary to the experience 
of the English Civil Service under a non-contributory system. In 1857, 
the Commissioners on the Operation of the Superannuation Act as- 
sumed that the demand for a death benefit in the English Service was 
the result of the contributions then being paid. They recommended 
the abolition of contributions, but under the new non-contributory 
system the demand for a death benefit continued until it was finally 
granted by the act of 1909. (See their report, British Parliamentary 
Papers, 1857, Vol. XXIV, p. XII.) Mr. Miles M. Dawson has 
strongly indorsed Mr. Manly's statement. See Annals of the Ameri- 
can Academy of Political and Social Science, Vol. 38, p. 63. _ The 
same general position is taken by Mr. James J. McLaughlan in his 
"Fundamental Principles of Pension Funds" Transactions of the 
Faculty of Actuaries, 1908-9, p. 225. Mr. Manly wrote as follows : 

"Funds intended to provide a retiring allowance for the members 
of a staff are started by employers with the very best intentions, but 
it is doubtful whether they have ever proved altogether satisfactory. 

68 



CONTRIBUTORY SYSTEMS 

■Financial Basis Not Necessarily Affected. Similarly, the 
question of accumulating a fund on the actuarial reserve basis, 
instead of paying benefits as they come due from current reve- 

They have the tendency to breed a discontented spirit amongst the 
employees, and in some cases have proved more costly to the em- 
ployers than if they had created their own reserves and promised to 
give a guaranteed scale of superannuation for long and faithful 
service." 

"The general principle is undoubtedly good, and morally sound in 
the abstract, but it takes no account of the weakness of human nature. 
The principle that everyone should make a provision for his old age 
is one which we shall all approve. To encourage this principle, the 
employer says to his employees: 'If you will all consent to contrib- 
ute a percentage of your salaries to create a fund for providing 
pensions in your old age, I will subscribe an equal amount each year' ; 
or 'I will give you a sum down to start the fund.' Sometimes, he 
adds : 'And I will guarantee that the fund shall be accumulated at 
a fixed rate of interest.' In this way he feels that he has acted the 
part of a philanthropist in encouraging thrift; he thinks that his staff 
will be more contented and settled and are not likely to leave him 
where they have a stake in the fund; and he has allayed an uneasy 
conscience which half recognized an unpleasant responsibility to help, 
in his old age, a man who has given him a lifelong service. The 
employees' view of the arrangement is very different. To him the con- 
tribution is a hardship and an obnoxious tax; and, although he gave 
his consent to subscribe, it was an agreement made under moral 
compulsion. What benefit will it be to him ? He will never live to 
65; and if he does, he is not going to stick in that firm all his life. 
He does not see why he should be taxed for the benefit of the old 
members of the staff, who will be retiring soon. The governors might 
at least raise their salaries to enable them to pay the tax. And if the 
employer does take a generous view of the case and raise their sal- 
aries, the contribution to the fund does not cease to be a tax. It is 
always a tax, and is always a very good excuse for asking for increase 
of salary." 

"Now where there is taxation, there should always be representa- 
tion; and the staff are generally invited to elect representatives as 
managers of the fund, the employers nominating the trustees and 
reserving to themselves certain powers. The men, starting with the 
idea that they are never likely to live to 65, want to arrange to have 
their money back somehow. If they could have a pension at 50 or 
55, or even 60, that might make a difference ; but, even then, they 
would like to have their money back if they did not live to get a 
pension. This then is the kind of reasoning which takes place: 
Firstly, 'Suppose we leave the service, it would not be right or just 
that you should keep our subscriptions'; and it is agreed that, on 
leaving the service, the member's own subscriptions shall be returned 
to him without interest. Secondly, 'What is to happen if we die 
before reaching the pension age? My wife and family ought to have 

69 



RETIREMENT OF PUBLIC EMPLOYEES 

nues — a highly important matter discussed at length in Chap- 
ter XV, pages 325 and 337, has sometimes been considered 
part of the question of contributions. The only relationship 



the benefit of the fund'; and so it is agreed that in case of death be- 
fore the pension age, the employee's and his own subscriptions shall 
be returned without interest, or his own subscriptions with compound 
interest shall be paid over, or both his own and employee's subscrip- 
tions with compound interest shall be paid out. Thirdly, 'Suppose 
a man has to retire through ill health before the pension age, what is 
to be done for him ?' Well, he might be treated in the same way as 
if he died; or he may have his pension according to scale. Fourthly, 
'But then a man might die directly he reaches the pension age, or 
after he has only received his pension for one year ; it would not be 
fair to his family that all his subscriptions for a lifetime should be 
left in the fund.' And so it is agreed that if a member dies before his 
pension receipts amount to what he has paid, the balance shall be 
paid to his family." 

In contrast with Mr. Manly' s statement, the following extract 
from the Seventh Annual Report of the Carnegie Foundation for 
the Advancement of Teaching, p. 63, New York, 1912, is interest- 
ing. 

"The following statements contain the principles that experience has 
shown to be worthy of particular attention in the case of those organ- 
izing industrial pension systems: 

1. The pension system, if undertaken, should be adopted solely as 
the ground of the benefit to those in employment, and with no ulterior 
purpose. 

2. The pension system should be on the contributory plan, main- 
tained at the cost of the company and of the employees. 

3. The management should be in the hands of a board composed of 
representatives of the company and of the employees. In many 
cases an outsider will be a useful member. 

4. The sum paid in by any employee should be returned with a 
moderate stated interest in case of his resignation from the service 
before the pensionable age or in case of his dismissal. In case of 
his death before the pensionable age, this sum should be returned to 
his estate. 

5. No step should be taken in fixing the rates of benefit except 
upon expert actuarial advice. 

6. Since no actuary can tell in advance exactly what will occur, 
the rules of the pension fund should require an examination at stated 
intervals, and the conditions should reserve the right to the repre- 
sentative board to make such changes as experience may show to be 
necessary in the interests of all." 

"The benefits so far considered have been of a. subsidiary character. 
Returns of contributions are excrescences, devised to meet the griev- 
ances which the employees think exist when everything is forfeited 
on death or withdrawal before entering on pension. These grievances 
are more imaginary than real, because, if no return be made, more 

70 



CONTRIBUTORY SYSTEMS 

is that if contributions are paid, a fund is perhaps more 
to be established, and if once established, the absence o 
proper actuarial reserve basis slowly but surely becomes * 

parent and reform becomes imperative. A non-contribut *&. 
system could be operated on an actuarial reserve basis, ^ 
the second English experiment with a contributory systc 
for civil employees of the central government was operated ol. 
the assessment or cash disbursement basis for a number of 
years, 2 

Cost of Benefits Not Affected, So far as the cost of tl 
benefits is concerned, the question is practically of no im- 
portance. From the point of view of the actuary, the matter\ 
of who pays for the benefits is of consequence only in so far 
as payment by the government might cause some employees to 
take an advantage of the system which they would not take if 
the money to pay for it had to come out of their own pockets 
or the pockets of their fellow employees. In technical lan- 
guage, payment by the government might introduce an element 
of selection against the system which would be absent if the 
employees paid for the benefits. The area within which such 
selection might operate is probably small and the point can 
hardly be regarded as constituting any fundamental difference 
between the two types of systems. 

Economically Unimportant to New Employees. To em- 
ployees who enter the service after the establishment of the 
system — the only class now being considered — the question 
is theoretically of little economic importance. Under the con- 
tributory system candidates for the public service are offered 
a certain rate of pay subject to certain deductions made to 

funds will be available for the pensions ; and, in the prospect of 
higher pensions should they maintain their membership, the em- 
ployees will receive compensation for all they pay in." — George King, 
"On Staff Pensions," Journal Institute of Actuaries, April, 1905, Vol. 
XXXIX, p. 157. 

2 For a discussion of this experience see pp. 81 to 84. 

7 1 



RETIREMENT OF PUBLIC EMPLOYEES 

meet, in whole or in part, the costs of the benefits conferred 
by the retirement system. They know the exact amount of 
cash they will get on pay day and they know how much will 
be withheld for benefits. Under the non-contributory system 
they are offered a certain amount of cash to be paid on pay 
/ifeys and certain benefits under the retirement system in event 
/4*of the happening of certain contingencies. They may or may 
not know what their benefits are worth. If the true considera- 
S tion for the services rendered is the same under either system, 
*%tw — in other words, if the amount of cash actually paid into the 
hands of the employee to do with as he will, added to the 
- present value of the benefits to be paid under the retirement 
system as the result of the services rendered within the period 
covered by the pay day, gives the same sum under either of 
the two systems, — the question of whether the employee shall 
be paid a higher salary with deductions or a lower salary with- 
out deductions becomes, from the point of view of the theo- 
retical economist, a mere matter of form. 

General experience tends to show that under a non-con- 
tributory system, the value of the retirement benefits, or per- 
haps more exactly speaking, their supposed value, is as a mat- 
ter of fact, taken into consideration in determining the 
amount of salary which will be attached to a particular posi- 
tion. Legislators and administrators will naturally rely in 
part on the attracting power of the promised benefits in get- 
ting the men they want at the salaries they offer. 3 Candidates 

3 The following quotations tend to show what was the practice 
under the non-contributory system for British Civil servants : 

"My Lords proceeded to consider what class of public servants ad- 
mitted by certificate, and in receipt of day pay or weekly wages, can 
be fairly considered to come within the denomination of being en- 
gaged in the permanent Civil Service of the State in an established 
capacity [and hence, under the law, entitled to free pension benefits]. 

"The true test of this appears to be a permanence of service which, 
while leaving untouched the power of dismissal for misconduct, estab- 
lishes at the same time such a mutual relation between the employer 
and the employee that a portion of the full market value of the labor, 
in the form of weekly wages, is forgone for the sake of steady em- 
ployment and the prospect of being provided for in old age. 



CONTRIBUTORY SYSTEMS 

for the positions will naturally consider the benefits in enter- 
ing the competition for vacancies; men who would not com- 

"When a laborer receives a full market rate of wages on employ- 
ment of a fluctuating or temporary nature, there can be no reason why 
the State should make him a present over and above of a retiring pen- 
sion which he would not obtain from any other employer. 

"On the other hand, when the employment is of a permanent char- 
acter, it is often for the mutual advantage of the State and its work- 
men that they should receive the fair price of their labor, partly in 
the form of present wages and partly in that of provision for the 
future, to accrue in case of retirement caused by ill health or old 
age, after a certain number of years' service shall have established 
a permanent connection. 

"These principles have been already acted upon in the dockyards 
and other public establishments, and it only appears to be necessary 
to apply the provisions of the Superannuation Act to the existing 
practice with some slight modifications." — Treasury Minute, dated 6th 
December, i860, quoted before the British Royal Commission on Civil 
Service Superannuation — British Parliamentary Paper, 1903, Vol. 
XXXIII, p. 99. 

How the "market rate of wages" under this Treasury Minute was 
defined is indicated by the following testimony given by Sir A. L. 
Haliburton before the Woolwich Arsenal Committee. (British Parlia- 
mentary Papers, 1889, Vol. XVI, p. 26.) 

"A question did arise as to the class of persons employed on day 
labor in the Royal Factories and other War Office Departments, and 
it was finally decided by the Treasury on the 29th August, 1861, under 
the powers granted by Section 2 of the Act, that no man in receipt 
of the full market rate of wages should get superannuation in addi- 
tion. I think I have explained to the Committee why that was, be- 
cause practically the government would be paying about 10 per cent 
more than anybody else for corresponding labor. A question arose 
as to what the full market rates meant. It was found impossible to 
name any given rates as a fixed standard of market rates, because 
wages differ in different trades and in different localities, and varied 
from time to time in the same trade and in the same localities. It was, 
therefore, decided on the 17th December, 1861, that the rate of wages 
paid at a station at which men are found willing to engage themselves 
for employment must be taken at the full market rate, it being 
optional with the men to accept or refuse such wages." 

Sir Francis Mowatt, Permanent Administrative Secretary of the 
Treasury, testifying before the British Royal Commission on Civil 
Service Superannuation (page 146, questions 4058 to 4060), gave the 
following evidence : 

4058. "Now in fixing the scale of pay of your different servants, 
you necessarily have some regard to the advantages secured by that 
annuity?" — "Yes." 4059. "Is it done on strict arithmetical calcula- 
tion?" — "No." 4060. "Have you any rough estimate of what the 
value is?" — "I am afraid I can hardly say even that. The circum- 
stances of the particular office, the circumstances of even particular 

73 



RETIREMENT OF PUBLIC EMPLOYEES 

pete for the salary alone will compete for the salary plus the 
promised benefits. If the legislators and administrators could 
accomplish the probably impossible, and could fix the actual 
cash salary at the point at which it would have been fixed 
had no "free pensions" been offered, their action would be 
equivalent to increasing salaries; and economic forces would 
tend to bring in new competitors who would not have con- 
sidered the position for the salary without the benefits. The 
real incidence of the cost of the benefits cannot in fact be 
fixed bv the simple device of providing in the law that the 
cost shall be paid in whole or in part by the one party or 
the other. The kind of employees secured in an honestly 

men, make it difficult to apply any definite rule. I do not think I 
can go nearer than this, that of late years when we have moved men 
from the non-pensionable part of the Service to the pensionable part 
of the Service, we have usually reduced their pay by something under 
io per cent. But I must explain to the Commission that that does 
not mean a permanent reduction of io per cent throughout their serv- 
ice, but only this — that so long as they are in the particular class to 
which they are transferred, that deduction is continued. When they 
are promoted, say from the third class into the second above them, 
that deduction terminates so that, practically, it is very much under 
the io per cent." 

The testimony of Sir J. McDougall, given before the British Royal 
Commission on Civil Service Superannuation (p. 138) regarding the 
practice of the London County Council, is also in point. 

3803. "Have you any reason to doubt that you get clerks and other 
officials at the market rate?" — 'There is great competition to get in 
the County Council Service." 3804. "But you have no reason to 
believe that the salaries are less in consequence of the system now 
existing of the County Council's giving a contribution?" — "I must 
say that whenever salary is considered, the question is mentioned, 
'Is he entitled to a pension or not?' I presume that has something 
to do with it, but I do not think it has to do with fixing the salary 
perhaps in the first instance, but it has to do with increasing it." 

That the same tendency operates in the United States is apparent 
from the following extract from the 10th Report of the Carnegie 
Foundation for the Advancement of Teachers, New York, 191 5, p. 33. 

'There is noticeably in these institutions a tendency to hold instruc- 
tors or assistant professors by the help of a pension. A younger 
man offered a salary of two or three hundred dollars more at another 
institution declines it, because he hopes thirty years later to receive a 
pension, but does not take into account the fact that the difference 
of salary in this interval would have paid the pension several times 
over, provided it had been saved." 

74 



CONTRIBUTORY SYSTEMS 

competitive system will depend not solely on the actual money 
wage paid into the hands of the employee for immediate use, 
but upon the general conditions of service, of which the actual 
immediate wage forms but a part, though, of course, a highly 
important part. Since better conditions draw better men, eco- 
nomic forces tend to place the ultimate burden on the em- 
ployee; if the government attempts to carry it, the result in 
the long run is an equivalent improvement in the type of em- 
ployees secured. So far as the real or ultimate incidence of 
the burden is concerned, it is, therefore, of comparatively little 
importance whether the system be non-contributory or wholly 
or partially contributory. 4 

4 "Aside from moral and social considerations, it makes little, if 
any, difference in the long run whether the public or the teacher 
pays the cost of the retirement allowance, or what proportion each 
contributes. This is particularly true in the case of those hereafter 
entering the profession. In settling the wage, the school authorities 
will, either directly or unconsciously, take into consideration the cost 
of the public contribution to the retirement allowance as a real, 
though somewhat vaguely defined, part of the total wage. In this 
way the concession of public support would become a factor in each 
new wage adjustment as certainly and as potently as any other por- 
tion of his wage compensation. 

"On the other hand, the new teacher facing employment soon comes 
to look upon his total actual salary as made up of a current salary 
composed of amounts withheld from his own earnings and invested in 
savings for him, and deferred payments for service in the form of 
public contributions to a retirement allowance, to be received at some 
time in the future, for continuous faithful service. The immediate 
placing in operation of a retirement system operates to diminish the 
salary of the beneficiary, but in the long run this is not the case. 
After a system of this sort has been in operation for some time, the 
deductions from the employee's salary would so operate as to be 
largely a nominal affair." — "The Teacher and Old Age," by C. A. 
Prosser and W. I. Hamilton, Houghton Mifflin Co., Boston, 1913, 

P- 43- 

"The growing demand on the part of employees for pensions is 
really a demand for higher wages, using the expression 'wages' in 
this broad sense as the return which the employee gets for his labor. 
A pension is as much a part of an employee's real wages as are 
conditions of labor, guarantee of steady employment, board and lodg- 
ing (where these are included), medical attention, half pay in case of 
sickness, and other factors not included in the actual money wages 
received. Theoretically, the simplest way of dealing with labor would 
be the payment of a money wage, requiring the employee to provide 

75 



RETIREMENT OF PUBLIC EMPLOYEES 



Contribu- 
tions 
Disclose 
True 
Nature of 
System 



The practical economic differences are first that under the 
contributory system the employee knows the cash value of the 
benefits and is less likely to attach to them a value beyond their 
real worth, and second, that he is more likely to maintain a 
spirit of independence in his dealings with the government. 

Of Moral or Psychological Importance Mainly. The differ- 
ences in the moral and psychological effect produced not only 
on the employees, but also on the government as an employer 
and on the general public, are, in fact, the essence of this ques- 
tion of contributory vs. non-contributory systems. Operated 
on the contributory basis, the retirement system loses the color 
of charity and philanthropy. The government as an employer 
is led to see more clearly the rights and interests of the em- 
ployees and can less easily treat a movement for a change in 
the system as an act of base ingratitude. The employee can 
take the benefits in precisely the same attitude that he takes 
his salary or the insurance coming to him on the maturing 
of a policy, something that he has bought and paid for. 5 The 

for the hazards of employment and his old age. While here and 
there an employee does this, . . . the mass of the employees do not." 
— 'Tensions as Wages," by Albert de Roode, American Economic 
Review, Vol. 3, part 2, June, 1913, p. 287. 

"There is a tendency to speak of these pensions as being paid by the 
company, or, in cases where the employee contributes a portion, as 
being paid partly by the employer and partly by the employee. In a 
certain sense, of course, this may be correct, but it leads to confusion. 
A pension system considered as part of the real wage of an employee 
is really paid by the employee, not perhaps in money, but in the fore- 
going of an increase in wages which he might obtain except for the 
establishment of a pension system." — Idem, p. 288. 

See also the extract from ''Teachers' Pensions in Great Britain," by 
Raymond W. Sies, given in the foot-notes on page 104. 

5 "A retirement system, designed to advance the efficiency of teach- 
ing, while at the same time preserving as far as possible the self- 
respect on the part of those participating therein, should be supported 
in part by contributions from the prospective beneficiaries. Such a 
system then becomes in effect a form of compulsory insurance against 
loss of earning power due to old age, toward the cost of which the 
state makes partial contributions." — Mass. Board of Education, Spe- 
cial Report on Teachers' Retirement Allowances, January, 1913, 
Massachusetts House Documents, 1913, No. 1926, p. 5. 

7 6 



CONTRIBUTORY SYSTEMS 

greatest difference, however, is in the attitude of the general 
public. 6 In times of great financial stress, for example, in the 
period that immediately follows a war, an outcry is likely to 
be raised against a non-contributory system because the gov- 
ernment can no longer afford to be so generous. On the other 
hand, if the employees are paying heavy deductions from 
salary toward their own retirement, any proposal for a serious 
curtailment of the benefits appears in its true character, as a 
proposal, not to curtail a charity, but to reduce compensation. 
The contributory system promotes clear public thinking. 7 

6 The difference in the attitude of the public toward the two types 
of systems is perhaps revealed by the two following quotations: 

"But as far as the Pension List applicable to the Civil Service of 
this country [England] is concerned, I think the objection to it is 
based upon a misapprehension. I regard the pensions so granted as 
being part of the engagement of service. I regard them as a system 
of compulsory thrift, enforced by the state upon its servants. They 
are deductions from the salary of servants, and they are taken into 
account when they accept their position." — Right Hon. Joseph Cham- 
berlain, M.P., Addressing the Conference of Elementary Teachers 
at Birmingham, 1889. Quoted in Memorial of Civil Servants, ad- 
dressed to the Treasury. — British Parliamentary Papers, 1899, Vol. 
LXXVIII, c. 48. 

"Until recently, the various civil pension systems which have been 
proposed as furnishing a remedy have each, when analyzed, been 
open to such grave objections that they have met with deserved dis- 
approval. Of late, however, those interested in securing retiring 
pensions for the civil employees of the United States have been 
more and more recognizing that the main purpose of a civil pension 
system is not to provide pensions, but to improve the efficiency of the 
civil service by means of pensions ; not to create a large body of 
dependents supported at the public charge, but to enable, under gov- 
ernment supervision and care, the efficient members of its administra- 
tive staff to make, mainly at their own expense, sensible provision for 
their old age ; not to foster retention of the mediocre till the retiring 
age, but to strengthen the beneficent effect of the Merit System by 
furnishing additional motives for industrious and able men in the 
government employ to remain there ; and not to hinder, but to accele- 
rate the removal of the lazy or the indifferently good among the civil 
servants: in a word, to vitalize and energize the civil administration 
of the government by raising the general standard of efficiency. — 
"Civil Pensions for Federal Employees" National Civil Service Re- 
form Association, New York (?), 1909, p. 6. 

7 "Quite naturally, in view of the history of pensions, the 'straight 
pension' from the State is the first goal of the teachers' efforts. But 
as today viewed by the best students of social insurance, the straight 

77 



RETIREMENT OF PUBLIC EMPLOYEES 



Promote 

Intelligent 
Management 



Check 

Tendency 

Toward 

"Pension 

Graft" 



Intelligent management of the system and interest in its 
operation are, moreover, promoted by the contributory sys- 
tem. The payment of contributions, as has been noted before, 
tends toward the establishment of a fund and ultimately to 
its operation on an actuarial reserve basis, and toward the re- 
duction of any element of selection by the employees against 
the system. If the employees are formally represented on the 
managing board, as they generally are under contributory sys- 
tems, the result frequently is a more general understanding 
throughout the service of the problems involved. 

That the contributory system naturally acts as a check on 
the tendency toward treasury exploitation is perhaps its great- 
est merit. After the principle of contributions has become 
firmly established, general demands for increases of benefits, 
or for small changes in conditions, which will increase the 
cost, are less likely to arise if the burden of paying for them 
will fall in part at least on the employees. A movement for 
the abolition of contributions may of course arise at any time, 
but this issue when raised is large and clear-cut and is likely 
to be given the consideration that it deserves. It should, per- 
haps, be noted here that a change from the contributory to 
the non-contributory system, representing as it does an in- 
crease in compensation, may be made without incurring the 
ill will of the force ; whereas the introduction of a contributory 
system after a non-contributory system is exceedingly difficult 
unless salaries are sufficiently increased to enable the em- 
ployees to pay the contributions. 



Contributory System More Flexible. As will be explained 
more at length in subsequent chapters, the cost of retirement 
benefits is greatly influenced by such personal factors as an 



pension from the State is like the unwise charity which suggests the 
parody, it is twice cursed — it curseth him that gives and also him that 
takes." — 

David Snedden, Commission of Education of Massachusetts in 
Introduction to "The Teacher and Old Age," by Charles A. Prosser 
and W. I. Hamilton, Boston, Houghton Mifflin Co., 1913, p. 10, 

78 



CONTRIBUTORY SYSTEMS 

employee's sex and age at entrance into the service. If, for 
example, the conditions governing the grant of a superannua- 
tion benefit are based on age, the cost per dollar of benefit 
allowed, when distributed equally over the whole period of 
service, is much lower for the young entrant than for the 
old and is generally lower for a man than for a woman. The 
tendency is distinctly towards recognizing these differences 
in cost and regarding cost as the measure of equality in the 
treatment accorded different employees. Under the non-con- 
tributory system differences in cost can only be met by vary- 
ing the amount of benefits, unless the government chooses to 
spend more in proportion to wages for him who serves it but 
a short time than for him who serves it all his working years. 
Under a contributory system these variations in cost arising 
from personal differences can be met in two ways, not only 
by adjusting the amount of benefit, but also by varying the 
amount of the employee's contributions. The contributory 
system, in addition to the moral and psychological advantages, 
has the merit of being more flexible. 8 

Four Principal Objections to Contributions 

Numerous objections have been advanced against the con- The 
tributory system. They may be briefly summarized as fol- Enumerated 
lows : 

First is the argument that it was tried for many years in 
the British Civil Service and abandoned in favor of the non- 
contributory system. 9 

8 For a discussion of the proposal to have the government make 
equal contributions for all and to have the employee pay the balance 
necessary to procure the benefits in his individual case see p. 97. 

9 See 19th Report of United States Civil Service Commission, p. 28. 
Mr. Miles M. Dawson has used the historical argument more 

broadly in his criticism of Mr. Herbert D. Brown's plan of a savings 
and annuity system for the retirement of the superannuated em- 
ployees of the Federal Government. Mr. Dawson's statement is as 
follows : 

"The chief argument which is presented in favor of the methods 
now being specially urged, viz.: of a pension wholly contributory, 

79 



RETIREMENT OF PUBLIC EMPLOYEES 

Second is the argument that it is not in the interest of the 
government. Persons advancing this argument point out that 
a contributory system leads to the introduction of some bene- 
fits that are contrary to the interests of the government and 
of others in which the government has no interest, and that 
the result of the inclusion of such benefits is to increase the 
cost of the system and to diminish the control which the gov- 
ernment has over its employees. The benefits cited as being 
against the interests of the government are the right to with- 
draw contributions in the event of voluntary resignation, 
which is said to put a cash premium on resignation, and the 
right to something in event of dismissal. The benefits in 
which the government is regarded as having no interest are 
benefits in the event of death, either in the active service or 
soon after retirement. 

Third is the argument that it is contrary to the interests 
of the employees because their salaries are already so low 
that they cannot stand deductions, which are very unpopular 
and produce discontent. 

The final argument is that it necessitates the introduction 

but with the government making good deficiencies as to those who 
have not contributed in the past is that 'there is no hope that Con- 
gress would do anything beyond that.' It is also urged that it is 
more in harmony with American individualism and that it is really 
the best system. The experience in other countries is that even 
though a contributory system be adopted it is certain, soon or later, 
to be abandoned and that a system of pure savings is on account of 
the heavy burden which it imposes and the continuous dissatisfaction 
on the part of the employees with the returns, really the worst system 
ever devised. Yet in a new and prosperous country where new 
theories of government have been tried with much success it is per- 
haps natural that men should be so optimistic as to believe that plans 
which have worked badh' everywhere else may operate successfully 
under changed conditions." — ''Government methods of providing old 
age pensions" ; In International Actuarial Congress VII, Amster- 
dam, 1912, Reports, Memoirs and Proceedings, Amsterdam, 1912, VI, 
p. 215. 

In justice to Mr. Brown, it should perhaps be noted that he has 
not proposed a pure savings plan, but a savings and annuity plan. 
The fact that the accumulations under the savings part of the system 
would be used for the purchase of an annuity, greatly reduces the 
cost. 

80 



CONTRIBUTORY SYSTEMS 

of a cumbersome and elaborate machinery, which is entirely 
unnecessary, because the ultimate economic incidence of the 
cost cannot be affected by it, for the incidence is determined 
by the laws of supply and demand. 10 

Each of these arguments deserves careful consideration. 

Failure in English Civil Service. The contention that all The Facts 
contributory systems are doomed to failure because a con- E S n g°i s h e 
tributory plan was twice tried in the English service and was Experience 
both times abandoned seems hardly sustained by the facts. 11 
On both occasions the contributory system was introduced to 

10 A fifth objection was cited by the Commissioners on The Opera- 
tion of the Superannuation Act of 1857, British Parliamentary Pa- 
pers, 1857, Vol. XXIV, p. xiv, as follows : 

"Another objection to the system [of contributions] is that it neces- 
sarily raises questions as to the sufficiency or insufficiency of the 
superannuation allowances considered as an equivalent for the deduc- 
tions paid, and this not only with reference to the whole service, 
but with regard to particular departments or even individual cases. 
For example: it is a complaint in the Post Office, that as it is found 
that in that department a much larger number of officers voluntarily 
retire in course of their service than in most other branches of the 
public service, the result is that the deductions levied are supposed to 
be much more than an equivalent for the superannuation granted. In 
a similar manner, individuals complain that they are compelled to 
pay deduction, although from special circumstances there is little 
or no change of their ever deriving benefit from superannuations. 
Were the simple and more straightforward system adopted of en- 
gaging public servants at a certain net amount of salary without a 
conditional prospect of a superannuation on certain terms, all these 
causes of misapprehension and complaint would be entirely removed." 

The act of 1834 provided for uniform deductions of 2^ per cent 
for all employees receiving not more than 100 pounds a year and of 
5 per cent for all employees receiving over 100 pounds. It failed, 
moreover, to recognize many of the equities. 

A modern equitable contributory system on the actuarial reserve 
basis would vary the contributions according to the employees age at 
entrance, sex, and, sometimes, occupation. This objection is, there- 
fore, against a type of contributory systems and not against the prin- 
ciple of contributions. 

11 For the facts in general, see Report of the Select Committee 
on Civil Service Superannuation, 1856, British Parliamentary Papers, 
1856, Vol. IX, especially the testimony of Sir C. E. Trevelyan, Assist- 
ant Secretary of Treasury, pp. 14, 15 and 16, and of R. M. Branches, 
p. 106. 

8l 



RETIREMENT OF PUBLIC EMPLOYEES 

take the place of a non-contributory system, as a measure of 
economy without any offsetting readjustment. In other 
words, it was a reduction of compensation. In the first case, 
existing active employees who had entered the service under 
an agreement including the oayment of a non-contributory 
pension, were compelled to contribute without any additional 
allowance. They argued that it was a breach of their contract 
of employment, and Parliament, accepting this view, repealed 
the law and required the return of all contributions. In the 
second case, the vested rights of the employees already in 
the service were recognized, not only in respect to the salaries 
they were then receiving, but in respect to all increases of 
salary they might ever receive. They were forever exempt 
from deductions. Deductions were made solely from the 
salaries of new entrants, and the amount of pensions to be 
allowed new entrants was reduced. Men were thus working 
side by side, some entitled upon retiring to a large pension for 
which they were contributing nothing, while others were en- 
titled upon retiring to a smaller pension for which they were 
forced to contribute through deductions from salary, and 
the only difference between the two classes was that the former 
were appointed before a given date and the latter after. The 
salary deductions from the new entrants were not formed into 
a fund to accumulate at interest to provide for the benefits 
of those who had contributed, but they were used immediately 
to pay the pensions of persons already on the retired list who 
had never paid contributions. The contributions were not 
an actuarial basis, and the employees believed very generally, 
though, as it afterwards appeared wrongly, 12 that if the con- 
tributions had been funded, they would have been more than 
sufficient to purchase all the benefits granted. In other words, 

12 See Supplemental Report of Commissioners in the operation of 
the Superannuation Act (British Parliamentary Papers, 1857-58, 
Vol. XXV), which contains the report of the actuaries, Ansell and 
Morgan, to the effect that the 2^ and 5 per cent deductions under 
the Act of 1834 would not, if funded, have been sufficient to pay 
the pension claims. 

82 



CONTRIBUTORY SYSTEMS 

the employees believed, with some very good authorities to 
support them, that the government was making a profit out 
of them. No provision was made for a return of contribu- 
tions in the event of death in the active service, and, in conse- 
quence, cases were not lacking where an employee on his 
deathbed would send his wife to collect the last salary pay- 
ments due him and she would get the salary minus the deduc- 
tions to provide a superannuation benefit. The English treas- 
ury department had a file of letters from widows who had 
vainly tried to get back their husband's contributions to "the 
fund," 13 not knowing that although everyone spoke of "the 
fund," it did not exist and that the contributions were used, 
when collected, to pay the pensions of those already retired. 
The ministry which devised the scheme had not conceived of 
contributions as a part of an ideal retirement system; their 
object had been to create a special tax on government em- 
ployees as a revenue measure, a procedure which they re- 
garded as less objectionable than a reduction of salaries. 14 To 

13 See testimony of Sir C. E. Trevelyan, Assistant Secretary of 
Treasury, before Select Committee on Civil Service Superannuation, 
1856, British Parliamentary Papers, 1856, Vol. IX, questions in 
and 112, p. 14. 

14 Sir J. R. G. Graham, who, as representative of Lord Grey's Gov- 
ernment, introduced in Parliament, the Act of 1834, — the second Eng- 
lish experiment with contributions — gave the following testimony 
before the Select Committee on Civil Service Superannuation, 1856 
(British Parliamentary Papers, 1856, Vol. IX), Question 2909. 
"Supposing a special fund had been created, and it had happened 
that the payments to that fund were more than enough to meet the 
charges upon it, would it not have appeared equitable either to in- 
crease the payments to the civil servants, or to reduce the payments 
which they made to the fund? — That is not the view that I took 
at the time, or that I now take. I think that the deduction then 
made prospectively was such as would not only cover the payments 
to be made to the individuals, but would diminish the deadweight 
charge for superannuations generally; and that of course was taken 
in preference to a larger reduction of salary, which would have been 
made had not the provisions stood as they now stand in the Act of 
Parliament," p. 286. 

Question 2923: "Then was it to be an insurance for the benefit of 
those who paid the deductions, or was it to be an insurance for the 
benefit of those who did not pay them ; were persons who did not pay 
the deductions to have the benefit of them in any way? — I will en- 

83 



RETIREMENT OF PUBLIC EMPLOYEES 

cite this legislation of the period 1820 to 1830, when the appli- 
cation of actuarial science to the problem had not been devel- 
oped, as proof of the inevitable weakness of a contributory sys- 
tem, is, to say the least, not conclusive. In fact, the general 
tendency in England at the present time is toward partially 
contributory systems, and from the evidence available one 
would judge that if it were possible to start over again the 
English government would adopt a partly contributory system 
for its own employees. 15 

The Death Against Interests of Government. That the contributory 
Benefit system leads to the repayment of contributions in the event 

deavor to state to the Committee what I remember as the principle of 
the deduction; that in lieu of making a large reduction of salary, 
there was a deduction made in the nature of contributions for super- 
annuation, which was so large as not only to cover the individual 
claims of all those who contributed, but which would operate in 
diminution of the charge for superannuation generally. Whether 
that were strictly equitable or not, I will not presume to say, but that 
was the intention of those who introduced it. It was not concealed 
from Parliament, and it was adopted by Parliament, and all those who 
have contributed have done so under ample notice; they entered the 
public service well knowing that there were contributions and these 
terms would be exacted," p. 287. 

15 The National School Teachers' (Ireland) Pension Fund (1879) ; 
The Elementary School Teachers' Deferred Annuity Fund (1898) 
and The Scotch Teachers' Superannuation System (1911) are all 
partly contributory as is the fund under the Police Superannuation 
Act of England and Wales (1890). The following municipalities 
have established partly contributory systems, London (1907), Liver- 
pool (1893 and 1912), Manchester (1892), Edinburgh (1906), Brad- 
ford . . ., Newcastle on Tyne (1904), Croyden (1893 an d I 9°4)> 
Halifax (1911), St. Helen (1911) and Booth (1899). 

Prosser and Hamilton say: "In the early schemes for the pro- 
tection of teachers in many European nations, straight pensions were 
given as a gratuity or bonus by the state without the payment of 
any dues or assessments, whereas, all the later ventures provide for 
the joint support by the public and the school master. This is the 
pronounced drift on the other side in all recent laws relating to old 
age or disability insurance. Even Germany, after having granted 
pensions to teachers entirely at public expense, has in recent years 
based her entire program of social insurance upon the idea of the 
compulsory assessment of all who were to be protected by the numer- 
ous successive and progressive laws which have been adopted." — The 
Teacher and Age, Boston, Houghton Mifflin Co., 1913, p. 20. 

84 



CONTRIBUTORY SYSTEMS 

of withdrawal and in the event of death in the active service 
or soon after retirement is, of course, perfectly true, and such 
benefits must inevitably increase the cost of the system. De- 
mands for the payment of a benefit in the event of death will 
arise, however, under a non-contributory system. The em- 
ployees will take the position that the benefits under a retire- 
ment system are in the nature of deferred pay and are earned 
by the employees. The average employee will desire that his 
deferred pay shall be applied to protect him from all the com- 
mon dangers of life and not solely to protect him from those 
which are of immediate concern to the government as an em- 
ployer, because he has others dependent upon him and early 
death, before he has raised his children, is a more obvious and 
threatening danger than inability to provide for his old age. 
In the absence of any provision in event of death, cases of 
extreme hardship will arise and some action will be necessary 
to allay the resulting dissatisfaction. The general tendency 
of the times, moreover, is toward widows' pensions and other 
systems of social insurance so that a demand for a benefit in 
event of death would receive a good deal of popular support. 
It may be safely concluded, therefore, that any retirement sys- 
tem at the present time would have to include some death 
benefit. The question of the exact nature of the death benefit 
is discussed in Chapters VIII, IX and X. 

The degree to which the payment of a benefit in the event The Benefit 
of withdrawal, due either to voluntary resignation or to dis- ^" n ^ Igna ' 
missal, is objectionable, is discussed at length in Chapter VII. Dismissal 
It is there pointed out that such a benefit is, to say the least, 
not wholly against the interests of the government. If a man 
becomes inefficient from causes which will not justify a re- 
tirement allowance under the rules, the administrative officer 
may hesitate to dismiss him, if dismissal means not only loss 
of salary but also loss of the accumulated provision for old 
age. If on the other hand in the event of a resignation, quietly 
suggested by the proper authority, the employee will receive 
either the reserve accumulated to pay his superannuation bene- 

85 



RETIREMENT OF PUBLIC EMPLOYEES 



Provision 
for Family 
of Dis- 
missed 
Employee 



Dis- 
ciplinary 
Control 



fit or an equivalent annual allowance, the administrator might 
well be far more ready to act. A broad public policy would 
seem to require the preservation, in so far as possible of the 
mobility of labor, and certain branches of government work 
could doubtless be greatly improved by making it easier, in- 
stead of more difficult, for a young man to pass from the serv- 
ice of the people in one organization of government to the 
service of the people in another. The man who is a conspicu- 
ous success, for example, in the administration of a given de- 
partment of a small city should be encouraged to seek a similar 
field in a larger city where his abilities can be further devel- 
oped through experience and be made more broadly useful. 
The remedy for the selection against the government, whereby 
many of its promising men are drawn off, is not to be found 
in imposing irritating penalties against resignation, but by 
improving the general conditions of the public service, by in- 
creasing its attractiveness as a profession. 

To allow to the family of an employee who is dismissed 
the benefit which would have been his had he resigned volun- 
tarily, is a procedure which, as set forth in Chapter VII, has 
distinct merits. It removes one of the motives for leniency 
which an administrator has in dealing with cases of moral 
weakness, the commonest type of which is probably periodical 
drunkenness. In such cases, the inclusion of a benefit on dis- 
missal is of real value to the public, because it gives the 
dependents something with which they may tide over the 
almost inevitable period of unemployment which follows dis- 
missal. 

The argument that it weakens the control of the adminis- 
trators over the employees is also considered at length in Chap- 
ter VII. It is probably enough to say here that administrators 
and appointing officers already have sufficient means of control 
through the powers of promotion, demotion, furlough and 
dismissal. Until the merit system of appointment extends to 
the higher positions in the public service more generally than 
it does at present, and until the actions of appointing and ad-. 

86 



CONTRIBUTORY SYSTEMS 

ministrative officers are better subjected to review, the problem 
is less to strengthen their control than to protect efficient and 
expert subordinates from the politically appointed higher offi- 
cials. The avenue of escape through resignation should not be 
obstructed with barriers of financial loss. 

Against Interests of Employees. The argument that the The Low 
contributory system is not in the interest of the employees Argument 
because their salaries are too low to permit payment of the 
deductions and because they do not like to pay them is largely 
based on experience in dealing with existing employees, a 
class which has to be considered after a satisfactory and prac- 
ticable scheme has been devised for new entrants. So far as 
future employees are concerned, the argument, on examina- 
tion, seems to be of little weight. If the salary offered for 
immediate payment, after deductions for a minimum provision 
for the various great dangers of life have been made, is too 
low, suitable candidates will not apply if they can find better 
terms elsewhere ; and the government as an employer will have 
either to lower its standards for employees or pay higher 
salaries. 16 Either course would indicate that its past salaries 

16 The following extract from the Report of the Commissioners on 
the Operation of the Superannuation Act (British Parliamentary 
Papers, 1857, Vol. XXIV, p. XXI, is worth quoting because it deals 
with an argument frequently advanced in considering salaries for 
public employees: 

"It is sometimes argued that no doubt even exists as to the suffi- 
ciency of the existing salaries, inasmuch as Civil appointments are 
eagerly sought for, and no difficulty is experienced in finding candi- 
dates for them. We doubt whether such a question can be so sum- 
marily disposed of. Even if salaries were still further reduced, we 
doubt whether there would be any lack of candidates for appoint- 
ment and for some time there might be no deterioration in the quali- 
fications of the applicants as, without scanning the terms of engage- 
ment very nicely, there would be a reasonable expectation that the 
government of the country would not fail to provide due remuner- 
ation for useful service. But if an impression was once allowed 
to prevail, that public servants were treated with unfairness, and their 
remuneration awarded in a niggardly and parsimonious spirit, 
although there might still be an abundant supply of candidates, we 
cannot help fearing that the public service would suffer from a 

87 



to Contribu 
tions 



RETIREMENT OF PUBLIC EMPLOYEES 

had been insufficient to enable the ordinary employee of that 
type to maintain his standard of living and at the same time 
to make such provision against future contingencies as the 
legislative agency, in establishing the retirement system, be- 
lieved he should make, not only to protect his own interests, 
but to protect his employer from losses through disability and 
superannuation. The new entrant could be seriously damaged 
only in case the government position was the best he could get 
and he was forced to provide for the future by spending in 
the present less than the minimum amount required for main- 
taining a reasonable standard of living. The government in 
such a case should doubtless raise the compensation, for, even 
if it were charity, a payment somewhat above the market rate 
for such service, it would be preventive charity applied at the 
source. 
Objections The chances of objections to the mere payment of contri- 

butions are very remote, if the contributions are withheld from 
the salary and are never actually paid to the employee and if 
the general interests of the employee are consulted in plan- 
ning the system. 17 According to the English experience ob- 
jections to contributions have generally accompanied objec- 
tions to other features of the system or have come from em- 
ployees already in the service who felt economic pressure or 

deterioration, as well in the qualifications of the applicants, as in their 
subsequent conduct when appointed. . . . 

"It appears to us that in the public service, no more than in private 
undertakings, can the number of candidates who may be seeking 
employment be considered as any criterion of the sufficiency of the 
salary. In both, the salary ought to be such as to command the 
requisite ability and character and also such as may be sufficient to 
maintain the servant in that position of life in which it is desirable, 
with a view to the interests of his employees, that he should be 
placed." 

17 "Do you think that the men would object to a contribution of 
that amount (2^ per cent) if the pension were secured to them? 
No, I have never heard the men complain of it, in fact it is stopped, 
we do not receive it ; it is deducted from the pay." 

Mr. Chambers, a constable, testifying before the Select Commit- 
tee on Police Superannuation Funds, British Parliamentary Papers, 
1875, Vol. XIII, p. 104, q. 2580. 

88 



CONTRIBUTORY SYSTEMS 



who believed that forcing them to pay contributions was an 
impairment of their contract. 18 

The objections raised in behalf of the future employees Employee 
seem, therefore, of little weight as compared with the great by°Contri- 
advantage that the employees derive under a contributory sys- butions 
tern from the fact that they are not so open to attack from 
members of the legislative body, or from some members of 
the general public, on the ground that they have a "pension 
graft" To the great number of self-respecting, industrious 
employees who have secured public positions through open 
competitive examinations, no one is more irritating than the 
politician who seeks to strike a popular chord by describing 
present-day civil employees in terms which were applicable 
to the general type of employees that the politicians gathered 
together under the spoils system. American public servants 
not only have to withstand certain corrupting influences that 
have survived from the old system, but they have to live down 
the reputation made by their predecessors. In America, there- 
fore, the public employees have a far greater interest in secur- 
ing a contributory system than have civil servants abroad, 
where government employees occupy a much higher position 
in public confidence. 

Expensive to Administer. The final objection against the 
contributory system, that it necessitates an elaborate machin- 
ery for collecting contributions, or, more properly speaking, 
for withholding contributions from salary payments, will have 
to be admitted, and it must also be admitted that the ultimate 
incidence of the costs of the retirement system will depend 
on the operation of general economic laws and not on the de- 
cision as between a contributory and a non-contributory sys- 
tem. 19 Even under a non-contributory system properly con- 

18 The question of the payment of contributions by present em- 
ployees is considered more at length in Chapter XIII. 

19 "Differences of practice in different countries in the matter of 
exacting contributions from teachers in support of public pension 
systems in their favor raises an important issue in the economics of 

89 



RETIREMENT OF PUBLIC EMPLOYEES 

ducted, however, a fairly elaborate system of records is re- 
quired, if the government is to have complete knowledge of 

teachers' pensions. Throughout Germany, with the exception of Ba- 
varia, teachers pay no contributions whatever; in France heavy 
retents from salaries are universal. Practice in Great Britain repre- 
sents a compromise between these extremes, since the contributions 
on the whole are moderate in amount. In the United States small 
contributions are usually required. Except for a period of years 
following the introduction of a substantial pension system, the writer 
distinctly favors the German practice, in view of its simplicity and 
administrative economy, because contributions or retents are not 
necessary in the long run to secure the perfectly legitimate end 
sought, viz. : partial or complete support of the pension system by 
the beneficiaries. The writer is firmly convinced that even in the 
case of an entirely non-contributory pension system, economic forces 
definitely tend to throw the whole burden of support upon the bene- 
ficiaries in so far as the pensions are really desired. To the extent 
that teaching positions or any other are rendered more attractive by 
the provision of pensions, the compensation in the form of salary 
of any given grade or quality of services gradually adjusts itself to 
the present value of the claim to a pension so that the total compensa- 
tion in the long run is not materially affected, other conditions re- 
maining the same. This adjustment takes place chiefly through the 
failure of the salaries to increase as they otherwise would rather than 
through actual reductions. The whole process is simply a readjust- 
ment of economic forces whose equilibrium has been disturbed by 
the introduction of the pension system. The process of equilibrium 
ordinarily requires a considerable period of time and for that reason 
the inauguration of a pension system with regular contributions is 
often justifiable, provided the contribution decrease in amount on a 
sliding scale through a period of years until they disappear." 

"The whole argument may be summarized in the two principles; 
(i) that pensions granted on condition of service are a part of wages 
or salary in the form of deferred payment, and (2), that the material 
rewards of teachers are controlled by the same economic laws as 
those of other workers," p. 72. 

"If the preceding arguments are sound, the requirement of contri- 
butions as a permanent feature of a teachers' pension system serves 
no useful purpose. Not only so, but the proper abolition of the con- 
tributions is a distinct economy, since they introduce needless com- 
plexity, are a source of constant irritation and misunderstanding, and 
are responsible for a vast amount of unnecessary bookkeeping and 
other clerical work. They represent thus a definite waste of time, 
money and energy. On these grounds the gradual elimination of the 
contributory features of the present British pension system for teach- 
ers, and without any reduction in pensions, would be a distinct advan- 
tage. As a permanent policy, the German practice is the correct one. 
The writer has no disposition to criticize the requirement of con- 
tributions as an initial temporary feature. This is considered per- 

90 



CONTRIBUTORY SYSTEMS 

and control over the liabilities that are accruing under the 
system and if each succeeding generation of taxpayers is to 
pay its own bills for services rendered. Given an adequate 
and complete machinery for an equitable non-contributory 
system, comparatively few extensions will probably have to 
be made to make it provide for contributions, even where rates 
of contribution are varied for different ages, sexes, and classes. 
One of the special merits of the contributory system is that 
it operates to impel the establishment of a proper actuarial 
system, whereas a non-contributory system can go on indefi- 
nitely on an improper basis provided that taxpayers are som- 
nolent. Even if the actuary working with the disbursing offi- 
cials of the government should find that the expenses of ad- 
ministration were somewhat increased by a contributory sys- 
tem it would be a grave question whether the advantages to 
be gained from it on moral and psychological grounds are 
not more than worth the possible difference. 

Summary 

Consideration of the arguments against the contributory 
system tends, therefore, to emphasize the main argument for 
it, its moral and psychological effect on the government as an 
employer, on the employees and on the public. The govern- 
ment does not profit from endeavoring to gain an artificial 
control over its employees or from consulting only its own 
most apparent immediate objects but from promoting, as 
nearly as may be, ideal working conditions for its employees. 
The employees' best interests are in openly contributing for 
their own retirement privileges so that they may maintain their 
independence. The public is made to see clearly that the ex- 
pense of the retirement system is an expense for service, a 
sort of depreciation charge, and not a charity or a benevolence. 

fectly sound, since teachers have no valid claims to the temporary- 
advantages falling to them as a result of the disturbances of economic 
forces occasioned by the abrupt introduction of a pension system," 
p. 73. Teachers' Pension Systems in Great Britain, Raymond YV. Sies, 
U. S. Bureau of Education, 1913, Pamphlet No. 34, Whole No. 544. 

91 



CHAPTER IV 

THE WHOLLY VS. THE PARTLY CONTRIBUTORY 
SYSTEMS AND THE INDIRECT CONTRIBUTIONS 
OF THE GOVERNMENT 

Definition. The Merits and Defects of Wholly Contributory Systems. 
The Merits and Defects of Partly Contributory Systems. Basis 
of Division Under Partly Contributory System. Equity as Be- 
tween Employees. Indirect Contributions. Expenses of Manage- 
ment. Guarantee of Solvency. Guarantee of Interest Rate. 

Definition. Contributory retirement systems, as was set 
forth in the preceding chapter, may be classified as "wholly 
contributor}-," if all the costs of the benefits are borne by the 
employee and as "partly contributory," if part of the cost 
is borne by the government and part by the employee. Under 
either type certain indirect contributions would probably be 
made by the government in the form of the expenses of opera- 
tion and certain guarantees. The purpose of the present chap- 
ter is to consider the merits and defects of these two different 
classes of contributory systems, the basis of division of cost 
under a partly contributory system, and the nature and extent 
of the indirect contributions of the government. 

The Merits and Defects of Wholly Contributory Systems. 
The wholly contributory system would probably have the max- 
imum effect in preserving the independence and moral stamina 
of the employees, in protecting the system from political attack 
and popular disapproval in times of financial depression, and 
in insuring for each employee full protection of all his interests 
and equities against any encroachments by the government as 
his employer, by the general public, or by his fellow em- 
ployees. It is probably, moreover, the type of system which 

92 



CONTRIBUTORY SYSTEMS 

would be most readily adopted by legislative bodies having a 
deeply rooted prejudice against a civil pension list, as the re- 
sult of unfortunate experience with military pensions. 

The principal objection to the wholly contributory system 
is doubtless the difficulty that is encountered in attempting 
to introduce it among present employees. Obviously they can- 
not pay in full for any retirement allowances that may be 
provided for them in respect to their past services, and, as 
is more fully discussed in Chapter XIII, they cannot easily 
pay heavy assessments in respect to their future services, be- 
cause their standard of living, or customary mode of expendi- 
ture, has been based on the receipt of their full salary to do 
with as they will, and any marked change results in hardships, 
real in many cases, and possibly imaginary in others. To give 
to the present employees benefits in respect to future services 
for which they pay only in part, if at all, while the new 
entrants are required to pay in full for the same benefits, is 
likely to cause friction ; and later when employees who entered 
after the establishment of the system become numerous, they 
are likely to advocate the abolition of contributions, using the 
precedent of government payments to present employees as 
a principal argument. 

Unless the introduction of a wholly contributory system 
is accompanied by a partially compensating increase of salaries, 
it may be argued, apparently with a considerable degree of 
soundness, that it is equivalent to a reduction of compensa- 
tion, and that the government is securing the benefits of a 
retirement system wholly at the expense of its employees. 
The details of this argument are somewhat as follows : Under 
the existing absence of system, the employee expects to be 
retained in the service — and he generally is — so long as he 
can satisfy the attendance regulations. If this prospect of 
practically life tenure was not one of the inducements for en- 
tering the service, it was in many cases one of the reasons for 
remaining in it. After the establishment of a retirement sys- 
tem, especially one containing a compulsory age of retirement, 

93 



RETIREMENT OF PUBLIC EMPLOYEES 

the employee loses this attractive permanency of tenure, and 
he is practically certain to be out of the active service in the 
latter part of his life, even if in good health for his age. The 
average number of working years, or, perhaps more accu- 
rately, the average number of full salary years that may be 
expected by government employees, has thus been shortened 
in the interests of the government, and it has been done en- 
tirely at the expense of the employee and consequently his 
compensation has been reduced. Unless it can be shown that 
the increased opportunity for promotion will offset this loss, 
the argument appears unanswerable. 

Consideration of these defects suggests a possible experi- 
ment that might be tried in the introduction of a wholly con- 
tributory system. The present employees might be continued 
at the existing scale of salaries, and be given on retirement 
certain minimum benefits entirely at the expense of the gov- 
ernment, as is discussed more at length in Chapter XIII. For 
new entrants a somewhat higher scale of salaries would be 
provided with a more elaborate and comprehensive system 
of retirement benefits, paid for wholly at the expense of the 
employee by deductions from salary. The actual cash paid 
to the new entrants would be less than was paid to entrants 
under the old system, because the new system would provide 
for them some of the things which under the old system the 
employees had to provide for themselves. A carefully pre- 
pared circular describing the system and giving the reasons 
for the arrangements should be furnished every employee; in 
fact, whatever the system, every employee should be fully 
advised of its terms and announcements of examinations for 
positions should contain accurate information regarding the 
important details of it. 1 Under a wholly contributory system, 
which is introduced by an increase in the salary scale for new 

1 For a striking illustration of the difficulties that may arise from 
failure to give each employee accurate information regarding his 
rights under the retirement system see "Report from the Select Com- 
mittee on Workmen (Woolwich Arsenal) [as to their right to pen- 
sion]. British Parliamentary Papers 1889, Vol. XVI. 

94 



CONTRIBUTORY SYSTEMS 

entrants, the fact should be especially emphasized that an in- 
crease in scale has been made in lieu of any contribution by 
the government toward the cost of the benefits provided under 
the retirement system and is made as a recognition by the 
government that it expects to reap an advantage from the 
system and at the same time to confer one on the employees. 
The object of the procedure would be to conserve to a maxi- 
mum extent the moral independence of the employee and to 
insure proper public recognition of the fact that the benefit is 
part of the employee's compensation. The increase in salary 
scale would be made as compensation for the sacrifice by new 
employees of that expectation, which was formerly held out, 
of being retained to extreme old age if he should be able 
to be in attendance at his duties. So far as is known, 
this experiment has not been tried, and the general pres- 
ent day practice is to introduce a partially contributory 
system. 

The Merits and Defects of Partly Contributory Systems. 
The partly contributory system has certain distinct advan- 
tages. It greatly simplifies a proper correlation of the scheme 
devised for new entrants with that planned for present em- 
ployees, and it eliminates, or at least reduces, the opportunity 
for the development of a sentiment that the government de- 
rives all the benefits and the employees pay all the costs. In 
general, it promotes a feeling that the government is cooperat- 
ing with the employees in the attainment of a common end, 
and it may even have the doubtful merit of "touching that 
chord in human nature which responds to the thought of get- 
ting something for nothing," to borrow a phrase used by Dr. 
Pritchett to record certain of his experiences in connection 
with the non-contributory scheme for college teachers, now 
being carefully reconsidered by the Carnegie Foundation for 
the Advancement of Teaching. 2 One of its real and indisput- 

2 See their Bulletin 9, "A Comprehensive Plan of Insurance and 
Annuities for College Teachers," New York, 1916. 

95 



RETIREMENT OF PUBLIC EMPLOYEES 

able merits is that, if the system contains any elements in the 
nature of insurance, it facilitates withholding in the event of 
resignation or dismissal the cost of insurance as is more fully 
set forth in Chapter VI, page 206. 

The defects of the partly contributory system probably de- 
pend on the division of the burden between the government 
and the employees. As the system approaches the non-con- 
tributory type, it runs the danger of demoralizing the em- 
ployee, of incurring popular disapproval in times of financial 
pressure, and of obscuring the real incidence of the cost, so 
that the employee does not get full recognition of all his in- 
terests. On the other hand, as it approaches the wholly con- 
tributory type, it increases the difficulty of coordinating the 
provisions for present employees with those for future em- 
ployees, and it increases the danger that the employees will 
feel that they carry the entire load whereas the government 
should bear its part. 



The Half 
and Half 
Basis 



Division 
According 
to Degree 
of Interest 



Basis of Division Under Partly Contributory System. In 
practice, the division of costs under a partly contributory sys- 
tem has not been based on any principles that could be charac- 
terized as highly scientific. The half and half division is the 
one that is generally adopted, though the government may in 
some systems pay somewhat less than half, because of profits 
it derives from forfeitures in the event of resignation or dis- 
missal. The half and half division has two distinct merits; 
it is simple, and it sounds fair. Scientific division, if it is ever 
attempted, would probably turn on the degree of interest of 
the parties in the particular benefits provided. The cost of 
benefits which are solely in the interest of the employee, such, 
for example, as a special insurance in event of death in the 
active service from causes not connected with the actual per- 
formance of duty, should apparently fall wholly on the em- 
ployee; whereas the cost of a benefit in event of death or disa- 
bility caused by the actual performance of duty should fall 
entirely on the government as an employer. A superannuation 

96 



CONTRIBUTORY SYSTEMS 

benefit is partly in the interest of the government as a means 
of eliminating those who in the absence of a system stay on 
beyond their days of usefulness, and it is partly in the inter- 
ests of the employees as a means of providing for those who, 
even in the absence of a retirement system, are obliged to re- 
sign because of the inroads of advancing age. The interest 
in a benefit for disability not incurred in the performance of 
duty is probably somewhat the same as in the case of a super- 
annuation benefit. The division of cost could undoubtedly 
be based on such considerations; and it would also be en- 
tirely possible for the system to provide certain compulsory 
benefits to be paid for by the government and the employee 
together, and certain optional benefits to be paid for entirely 
by the employee or by the employee with very slight assist- 
ance from the government. 

Equity as Between Employees. Another important ques- Considera- 
tion regarding the division of cost will undoubtedly demand Equities in 
careful consideration in the future as more and more atten- Division 
tion is given to the equities as between different classes of em- 
ployees. The percentage of an employee's salary which would 
have to be paid into a fund in order to provide, for example, 
a retirement allowance of half salary at age sixty-five, would 
largely depend, as is explained more at length in subsequent 
chapters, on the age of the employee at entrance into the 
service. For the employee who entered at a very early age 
such an allowance could be secured by paying into the fund 
each year a comparatively small percentage of the employee's 
salary, whereas for the employee who entered at a relatively 
late age, the payments into the fund would reach a very high 
percentage. The tendency in developing retirement systems 
is probably toward recognizing this difference in cost and 
toward adopting some device for promoting greater equality 
of treatment by varying either the rates of contributions or 
the amount of the benefit, or by combining the two methods. 
If the device of varying the rates of contributions is adopted, 

97 



RETIREMENT OF PUBLIC EMPLOYEES 



Uniform 
Govern- 
mental Con- 
tributions 



a question arises as to the justice as between individual em- 
ployees of the half-and-half division of the cost between the 
government and the employees. For illustrative purposes let 
it be supposed that to provide the benefits for the entrant 
twenty years of age, four per cent of salary would be required 
annually, whereas to provide the benefits for the entrant forty 
years of age, eight per cent of salary would be required. On 
the basis of equal division of these costs, the government 
would contribute two per cent of salary in respect to the 
younger entrant, and four per cent in respect to the older 
entrant. More is thus paid by the government for the older 
entrant than for the employee who serves from youth on. If 
it be assumed that at age forty-five each of the two is equally 
valuable and each is being paid the same salary of one hun- 
dred dollars a month, the older is receiving a true compensa- 
tion (salary plus the government's contribution toward the 
cost of prospective retirement benefits) of one hundred and 
four dollars, whereas the younger is receiving a true com- 
pensation of only one hundred and two dollars. This situation 
raises the question whether under a partially contributory sys- 
tem providing for a variation in contributions according to 
age at entrance, the government should not pay the same per- 
centage of salary in respect to all new entrants, regardless 
of their age at entrance, and that the employees should be 
required to pay the difference between this percentage and 
the one representing the total cost of their retirement benefits. 
The percentage paid by the government might be half the 
cost of the retirement benefits for an employee entering at 
the average age of entrance. In so far as the immediate wage 
paid into the hand is concerned, such a provision would place 
a premium on early entrance into the service and a penalty 
on late entrance, but, in reality, the goverment would be treat- 
ing all alike, paying for the same services the same total com- 
pensation. The difference in cost, according to age at en- 
trance, which is a personal difference, would be borne per- 
sonally by the employees. 

98 



CONTRIBUTORY SYSTEMS 

Indirect Contributions 

Whether the system is wholly contributory or only partially 
contributory, the government is ordinarily called upon for 
certain indirect contributions, or to assume certain special lia- 
bilities. It will be expected to bear the costs of manage- 
ment, to guarantee the soundness of the system, and, if the 
earning power of money is of the essence of the system, to 
guarantee the rate of interest assumed in the actuarial calcula- 
tions. Each of these three liabilities requires some considera- 
tion. 

Expenses of Management. Conceivably the expenses of 
management could be charged against the beneficiaries under 
a wholly contributory system by including in the sums de- 
ducted from the employees' salaries a sufficient amount to 
cover the expenses of the system. In technical language the 
premium could be "loaded" for expenses just as insurance 
premiums sold by private companies are loaded. It must be 
remembered, however, that the cost of conducting a retire- 
ment system under the government is by no means as great 
as the cost of operating a private life insurance company. 
The government incurs no expense for agents to get the busi- 
ness, it collects its premiums almost automatically by deducting 
them from the salaries, and the number of records which it 
has to keep over and above those required for salary pay- 
ments and for compliance with civil service rules and regula- 
tions is comparatively small. In England, some of the tech- 
nical actuarial work required has at times been performed 
by men connected with the government offices engaged in 
the supervision of insurance enterprises or in other work re- 
quiring a knowledge of actuarial science, but even if special 
provision has to be made for such assistance, the cost of ad- 
ministration will generally be relatively small and would ap- 
pear to be the minimum contribution by the government. 

Guarantee of Solvency. When a government establishes a 

99 



RETIREMENT OF PUBLIC EMPLOYEES 

retirement system, two of its principal objects are to induce 
men to enter its service who might not otherwise enter and 
to induce men to remain who might otherwise resign to accept 
more attractive positions. The benefits under the system, 
therefore, are part of the inducement, part of the considera- 
tion, or, in other words, part of the compensation. The gov- 
ernment is, therefore, under just as great a moral obligation 
to see that the benefits promised are paid as it is to see that 
the salaries and wages promised are paid. The obligation is, 
if anything, greater. Failure to pay promised wages or salary 
becomes apparent fairly soon and the employee, though dam- 
aged, can remedy the situation promptly by seeking other 
employment ; but failure to pay the promised retirement bene- 
fit may not occur until the employee has reached an advanced 
age and then the damage is great and irreparable. Sometimes 
the whole current of a man's life may be influenced by the 
fact that his employment promises him a retirement allow- 
ance if he breaks down in old age; relying on that promise, 
he may make no other provision. It is no consolation to him 
if the system breaks down, to have it pointed out that he has 
no legal redress, as the liability of the government was limited 
in the terms of the scheme and as his rights were only such 
as the legislation establishing the system specifically gave 
him. 

Legal limitations on the extent of the governmental liability 
to pay the promised benefits are, to say the least, highly im- 
proper. The government establishes the system and is under 
moral obligations to know that it is sound. The individual 
candidate about to accept an offer of a public position cannot 
possibly make himself, or pay for the making of, an actuarial 
valuation to determine whether the liabilities of the system 
as established by the government are greater than the assets 
provided, or to determine whether any specific limitations of 
liability are likely to be exceeded by the time he himself 
reaches the retirement age. Any limitation on the liability 
should, however, awaken an employee's suspicions, because 

IOO 



CONTRIBUTORY SYSTEMS 

it is presumptive evidence that the scheme is improperly or- 
ganized. 

The moral obligations of the government are probably 
equally great whether the scheme is non-contributory or wholly 
or partially contributory. It cannot well break its own prom- 
ise to pay certain benefits, though the cost may be greater than 
it had expected ; nor can it compel men to contribute money 
to purchase benefits and then send them empty away because 
the legislature which passed the retirement law did not have 
proper technical advice and adopted a miscalculation. Ob- 
viously all retirement systems operated or attempted to be oper- 
ated on an actuarial reserve basis should be subject to the 
supervision of state departments of insurance or other com- 
petent regulative bodies. 

If the legislation was adopted at the special request of the 
employees themselves and was their plan, the obligations of 
the government are perhaps somewhat affected, at least in so 
far as those who were in the service when the scheme was 
adopted are concerned. Then the mistake of fact is mutual 
and the employees and the government should both be pre- 
pared to make compromises to remedy the damage. 

Guarantee of Interest Rate. The rate of interest is a highly 
important factor in any system that provides for the accumu- 
lation of a fund. In certain types of systems, a specific 
amount of benefit is provided in return for a specific amount 
of contribution, and consequently failure to invest the funds 
at the rate of interest on which the calculations were based, 
results in an actual deficit. In certain other types, run more 
or less on a savings bank basis, a decline in the rate of in- 
terest makes the money which the employees contribute earn 
less than they expected and thus discontent is engendered. To 
avoid deficits and dissatisfaction the government frequently 
guarantees that it will contribute the amount by which the 
interest earned by the fund falls short of the interest ex- 
pected under the assumed rate. Obviously the interest rate 

IOI 



RETIREMENT OF PUBLIC EMPLOYEES 

guaranteed should be one which it is entirely reasonable to 
expect can be earned consistently. Guaranteeing a markedly 
high rate of interest is in the nature of a disguised contribu- 
tion. 3 To protect itself against undue risks from changes in 
the rate of interest the government must provide some rapidly 
acting method of altering the guaranteed rate at any time in 
respect to new entrants. 

Unless the government guarantees the rate of interest, a 
very low, very conservative rate will have to be assumed in 
the actuarial calculations on which the system is founded. 
More money will thus have to be collected than it is reasonably 
expected will be needed to yield the benefits desired. Unless 
a marked and unexpected fall in the rate takes place, the system 
will be confronted with a surplus, and some means will have 
to be devised for its distribution, either through cash pay- 
ments, similar to the "dividends" of a life insurance company, 
or through increases of benefits. This arrangement would 
lead to considerable increase in the cost of administration and 
would introduce many complicated questions regarding equita- 
ble distribution. Guaranteeing a fair rate of interest with 
adequate provision for changing it at any time in respect to 
new entrants would seem the simpler procedure. 

3 "We observe that the rate of interest recommended, 3 per cent 
per annum, is too high, if the funds formed from the teachers' con- 
tributions are to pay their own way, and this rate of interest cannot 
be guaranteed by the state without subsidizing the funds in an indirect 
and disguised form. We think that this would be an undesirable form 
for a state subsidy to take, and that any contributions from public 
funds should be direct and overt. The rate of interest obtainable 
upon investments in state funds is at present 2}4 per cent per annum 
and the teachers' contribution could not now be invested so as to 
obtain an appreciably higher rate. We think that this should, there- 
fore, be the rate of interest fixed in forming the tables under which 
the scheme is started." — Report of Departmental Committee on the 
Question of the Superannuation of Teachers in Public Elementary 
Schools, British Parliamentary Paper, 1895, Vol. XXVI, p. 8. 



CHAPTER V 
THE SUPERANNUATION OR SERVICE BENEFIT 

The Objects Sought in Establishing the Benefit. The Condition Upon 
Which Granted. Retirement in Discretion of Government. Re- 
tirement as Right at Option of Employee. Compulsory Retirement 
on Completion of Fixed Conditions. Optional Retirement After 
Fulfilling Minimum Conditions and Compulsory Retirement After 
Fulfilling Maximum Conditions. Age or Service, or Age and Serv- 
ice Conditions. Factors Involved in Deciding Upon Retirement 
Age. The Amount of the Superannuation Benefit. Three Divisions 
of Subject. The Amount of Superannuation Benefit and Amount 
of Salary. The Classes Described. The Discretionary Sum Inde- 
pendent of Salary. The Fixed Amount Independent of Salary. 
The Fixed Contribution Independent of Salary. Benefits Directly 
Dependent Upon Salary. The Salary Scale. Objections to the Use 
of Salary Scale. Benefits Indirectly Dependent Upon Salary. The 
Amount of Superannuation Benefit and the Length of Service. 
The Desirability of Relationship. Two Methods of Establishing Re- 
lationship. The Amount of the Superannuation Benefit and the 
Economic and Social Needs of the Employee. A Sum in Aid of 
Subsistence. Minimum of Subsistence. The Necessaries of a 
Standard of Life. The Absence of Sacrifice. Changing General 
Terms Into Concrete Figures. The Cost of the Superannuation 
Benefit. The Factors Determining Cost. Factors Causing Differ- 
ences in Cost Between Different Employees. 

The Objects Sought in Establishing the Benefit 

The first benefit provided in a retirement system is generally- 
one to enable the government to retire employees who have 
lost their efficiency through advancing age. As has been set 
forth at length in Chapter I, the improvement of the staff, by 
providing for the elimination of the superannuated, is one of 
the principal objects sought by the government in establish- 
ing a retirement system; and removal of the fear of de- 
pendency in old age is one of the principal motives that lead 
employees to advocate a system. The allowance made to the 
employee retired because of advancing age is generally spoken 
of as a superannuation benefit, but when it is given on condi- 

103 



RETIREMENT OF PUBLIC EMPLOYEES 

tion of long service, without special reference to age, it is fre- 
quently called a service benefit. The purposes of the two are 
essentially the same, and the difference between them is a mat- 
ter of detail. They will, therefore, be considered together, 
and will be spoken of generally as superannuation benefits. 

The Condition Upon Which Granted 

The Differ- The first general question that has to be considered in pro- 

Enumemed v ^ing a superannuation benefit is, "On what conditions shall 

such a benefit be granted?" In respect to the conditions laid 

down systems may be roughly divided into four general 

classes, which may be described somewhat as follows : 

1. Certain officers of the government are authorized in their 
discretion to grant allowances to employees who are super- 
annuated, and who have satisfied whatever special conditions 
regarding age or service may be prescribed by the law. The 
employee has no legal or absolute right to a superannuation 
allowance upon fulfilling these conditions, or upon retiring: 
he is dependent for it on the exercise of a discretionary power 
by some superior authority. 

2. The employee is given a legal and absolute right to retire 
on a superannuation allowance upon satisfying certain require- 
ments as to age or service, but he is permitted to use his own 
discretion in deciding whether or not to retire when he has 
fulfilled the conditions. The legislation, in other words, al- 
though creating an absolute right to an allowance, does not 
compel retirement. 

3. The employee is compelled by law to retire immediately 
upon reaching a fixed age or upon fulfilling a fixed period of 
service, and he is granted a superannuation allowance as of 
right. 

4. The employee is permitted to retire with a superannua- 
tion allowance granted, as of right, upon fulfilling certain min- 
imum age or service conditions, and he is compelled to retire 
with such an allowance upon fulfilling certain maximum age 
or service conditions. 

104 



SUPERANNUATION OR SERVICE BENEFIT 

The merits and defects of each of these four types require 
some consideration. 

Retirement in Discretion of Government. A system that The Theory 
permits retirement on a superannuation benefit solely in cretionary" 
the discretion of the government as an employer is gen- Pension 
erally spoken of as a discretionary system, and sometimes 
as a permissive system, because it authorizes or permits the 
payment of a benefit but does not require it. The chief advo- 
cates of a discretionary system are those who wish to pre- 
serve for the government a maximum control over its em- 
ployees. They believe that if no one is sure of a retirement 
benefit, all will work hard to deserve it and the government 
can grant it as a special recognition of merit or, in cases of 
great need, as a charity or benevolence ; they look with great 
disfavor on any proposal which would ever give to the em- 
ployees an absolute right to retire with a benefit. This con- 
ception of a superannuation benefit, as a sort of combination 
of a pension for meritorious services and a charity or philan- 
thropy, was perhaps the dominating one in the minds of Eng- 
lish administrators and legislators until roughly the latter quar- 
ter of the nineteenth century and consequently the English 
experience affords some excellent opportunities to study the 
discretionary system in operation, notably in the cases of the 
constabulary, the City of London, and the Metropolitan Dis- 
trict police, the medical officers under the Irish poor law, 
and the teachers in the schools aided by government grants. 
In each case a retirement system, originally discretionary, be- 
came involved in difficulties, and one of the features which 
was carefully reviewed and found wanting was this element 
of discretion. Its actual operation is very different from its 
theoretical operation and it has striking and probably in- 
superable defects. 1 

1 The following reports in the British Parliamentary Papers are of 
interest in this connection: 
Report of the Select Committee on Police Superannuation Funds, 

105 



RETIREMENT OF PUBLIC EMPLOYEES 

Injurious The interests of the government which the discretional*}' 

to the Gov- S3'stem is, in theory, designed to protect, are not, in fact, safe- 

ernment • 

guarded. Lender it retirements may be made, not for the good 
of the service, but absolutely against its interests. A common 
practice among the English police, in so far as one can judge 
from the evidence, was to seek retirement as soon as they 
thought they had a good chance of getting it, or, in other 
words, to give way to the not unnatural desire to make an 
uncertainty certain at the earliest possible moment. This de- 
sired result was apparently accomplished at times by bringing 
influence to bear on those whose duty it was to exercise dis- 
cretion. As soon as the employee who wanted to retire 
thought his wires were in order, he applied for his pension; 
and with it once safely voted to him for life during good be- 
havior, he sought, if he had not already found, some other 
occupation by which he could supplement his allowance. On 
the other hand, the superannuated man who did not want to 
retire would exert his influence to remain on the active roll 
on full pay. The object of the weak employee, it was charged, 
became not so much to perform his duties as he believed they 
should be performed, as to perform them in a way which he 
believed would be pleasing to the persons in whose hands lay 
the power to grant him a pension. The question was raised 
whether, in some cases, officers did not hesitate to enforce, 
for example, the liquor laws if they happened to know that 
one or two members of the watch committee of the council 
who would vote on the question of their retirement were in- 
volved in the violations. Similarly, medical officers under the 
Irish poor law complained that they were illegally called upon 
to attend without charge persons who were able to pay for 

1875, Vol. XIII. Report of the Select Committee on the City of 
London Police (Pension Bill), 1889, Vol. 9; Report of the De- 
partmental Committee on Metropolitan Police Superannuation, 1890, 
Vol. LIX; Report of the Committee on the Union Officers Super- 
annuation; Ireland Bill. 1882, Vol. XIII; Report of Committee 
-whether by deductions from the Parliamentary Grant in aid of Ele- 
mentary Schools, etc., 1872, Vol. IX; Report of the Select Committee 
on the Asylum Officers Superannuation Bill, 1909. 

106 



SUPERANNUATION OR SERVICE BENEFIT 



Uncertainty 



their services and who had secured tickets entitling them to 
free treatment in gross violation of the law, but the medical 
officers were more or less estopped from reporting to the 
local government board, because the guardians who were in 
the habit of issuing the tickets as sort of trading stamps to 
persons who patronized them were the men who would de- 
termine whether the medical officers should have pensions. 2 

Such cases of disregard of the public interest are probably financial 
more or less inevitable under a discretionary system in the 
public service, but it has another objectionable feature from 
the standpoint of the government. It is financially uncertain. 
To what extent such a discretionary power will be exercised 
is a difficult thing to predict ; and the most elaborate and pains- 
taking actuarial computations may go for naught, if a change 
of party brings into office a group of men who utilize their 
legal discretion in making vacancies for the "deserving" by 
retiring the existing officers on pensions. A discretionary sys- 
tem, therefore, must almost inevitably be operated on the cash 
disbursement or assessment plan, whereas, perhaps, more than 
any other it needs that strict accounting control that comes 
from the actuarial reserve basis. 

From the point of view of the employees, a discretionary 
superannuation benefit is vicious. It leads to discrimination 
between employees : the man who has powerful influence with 
the arbiters receives a pension when he wants it, whereas the 
man who is without influence or who has incurred the dis- 
pleasure of the arbiters may receive no consideration what- 
ever. Under a wholly or partially contributory system, the 
employees may see their funds dissipated by a political un- 



Against 
Interests of 
Employees 



2 See report of the Committee on the Union Officers Superannuation 
(Ireland Bill), British Parliamentary Papers, 1882, Vol. XIII, p. 57. 
For a case in which a doctor in charge of a hospital for the insane 
had offended a member of the committee which would pass on his 
superannuation, by rejecting as unfit for food meat furnished by a 
contractor, partner of the committeeman, see report of the Select 
Committee on the Asylum Officers Superannuation Bill, British Par- 
liamentary Papers, 1909, p. 23, question 306. 

107 



RETIREMENT OF PUBLIC EMPLOYEES 

loading upon the retirement list. Instead of adding a new cer- 
tainty to their lives, it adds a new element of uncertainty. The 
man who has been careful and painstaking throughout the long 
years of his service may be dismissed without pension in his 
old age because of some errors due to his enfeebled condition. 
On the other hand, the man who has served faithfully for 
years may have produced against him the record of some early 
offense, long since atoned for. 3 The ingenuity of the repre- 
sentative of the taxpayer who is trying to find some reason 
why a pension should not be granted an employee who is 
forced to retire because of old age is great, especially if the 
cost of the retirement is directly chargeable against the tax 
levy. 4 One employee may be refused a pension because he 
has saved something and needs no assistance, whereas another 
will be refused on the ground that, although he has saved noth- 
ing, he ought to have saved. The administrators not infre- 
quently seem to regard the awards as a form of outdoor poor 
relief, and they generally absolutely refuse to consider the 
point of view of the employees that the benefits under a retire- 
ment system are part of the compensation and that an em- 
ployee is as much entitled to them as he is to his salary or 
wages. 5 

Retirement as Right at Option of Employee. Retirement 
at the option of the employee, after he has fulfilled certain min- 

3 Report from the Select Committee on Police Superannuation 
Funds; British Parliamentary Papers, 1875, Vol. XIII, p. 53, q. 125, 
and p. 120, q. 301. 

4 For a list of reasons advanced for refusing pensions under the 
Union officers discretionary system, see "Report of Committee on 
the Union Officers Superannuation (Ireland) Bill," British Parlia- 
mentary Papers, 1882, Vol. XIII, p. 92. 

5 The London City Police, according to the Commissioner, Sir 
James Fraser, preferred a lower benefit by right than the higher 
benefit which was discretionary. Possibly they were affected by the 
insolvency of the fund and the necessity for going to the rates for 
money. Benefits were frequently held up and a man kept on the active 
force when he should have been retired. — Report from the Select 
Committee on the City of London Police (pension) Bill, British Par- 
liamentary Papers, Sessional Papers, 1889, Vol. 9, p. 12, q. 199. 

108 



SUPERANNUATION OR SERVICE BENEFIT 

imum conditions regarding age, length of service, or both, is, 
of course, perfectly fair to the employee, provided the detailed 
conditions are reasonable. It recognizes all his rights and 
practically lets him consult his own convenience about retiring. 

The rights and interests of the government under such a Failure to 
system are not sufficiently protected. In case an employee is q^^. 
incapacitated by old age, but is anxious to continue on the ment 
active rolls, as is not infrequently the case, the burden of the 
initiative is placed on the administrator, who must either at- 
tempt to persuade the old employee to retire or take active 
steps toward his dismissal. The fact that the old man would 
have something to live on would undoubtedly make adminis- 
trators more ready to act than they are when no retirement 
allowance at all is available, but in certain special and im- 
portant cases, the old forces would still come into play. In- 
fluence, both political and social, would operate to keep on the 
active payroll men who should long since ha^e been retired 
for the good of the service; and the administrator upon whom 
rested the responsibility for suggesting his own retirement 
would rarely grow old ; each year would but add new riches 
to the value of his long experience. 6 



Compulsory Retirement on Completion of Fixed Condi- 
tions. Compulsory retirement at a fixed age, or after a fixed 
period of service, is the remedy frequently suggested to meet 
the difficulty. It involves selecting an arbitrary age at which 
all men are assumed to be incapacitated, or an arbitrary length 



Fixed Age 
Inelastic 



6 The English system for civil servants originally permitted retire- 
ment at the option of the employee, provided minimum age and service 
conditions had been fulfilled. Both the commissioners on the Oper- 
ative of the Superannuation Act (Parliamentary Papers, 1857, Vol. 
XXIV, p. XVI) and the Royal Commission on Civil Establishments 
(Idem, 1888, Vol. XXVII, p. XXII) reported against the device and 
recommended a compulsory age of retirement. By order in council 
dated November 29, 1898, all persons in the established service are 
liable to compulsory retirement at the age of 65. The power of re- 
tention in special circumstances for a period not exceeding five years 
is, however, lodged with the Treasury. 



109 



RETIREMENT OF PUBLIC EMPLOYEES 



The English 
Device of 
Special 
Extensions 



of service after which they are assumed to be worn out. The 
assumption, unfortunately, is contrary to the common experi- 
ence of mankind. Everyone knows of striking instances in 
which men have reached the three score years and ten in full 
possession of all their mental faculties and with a mind that 
is a veritable treasure house of wisdom; and on the other 
hand they know of cases in which men grow old prematurely 
and in which the mind ceases to develop or even goes back 
before the man's contemporaries have begun to approach their 
zenith. A fixed age that would lead to the retirement of the 
prematurely old at the proper time would rob the public serv- 
ice of many of its invaluable older men, whereas a fixed age 
designed to retain the exceptional men would retain many who 
are not exceptional. 7 

In the English civil service what may be termed an experi- 
ment is being tried with a provision that fixes the compulsory 
age of retirement at 65 but permits the treasury to authorize 



7 "The arbitrary retirement of teachers at a given time determined 
by age, or by age and service together, is wasteful. At best this time 
can be properly adapted only to the so-called average or typical 
teacher: Some teachers of impaired efficiency should be required 
to retire earlier on smaller pensions and others who retain their effi- 
ciency should be permitted and even expected to continue in service. 
The retention of the first-class teacher till an arbitrarily fixed time 
is obviously poor economy. The arbitrary retirement of teachers still 
fairly efficient is no less wasteful, for in such cases the public is 
required to bear two burdens, salary and pension, when one would 
serve the purpose just as well. The ideal plan is one in which the 
time of retirement on pensions, subject to the fulfillment of reason- 
ably low minimum conditions of age and service, depends upon the 
decision of a State Board of Retirement or other central agency with 
power to compel retirement or to require continuation of service as 
the public interest demands.'' — R. W. Sies, Teachers' Pension Sys- 
tem in Great Britain, p. 81. 

"The late William T. Harris always insisted that a college professor 
was at his best between the ages of 65 and 75, and he urged the trus- 
tees of the Carnegie Foundation at the inception of the trust not 
to make the minimum retiring age lower than 70. Mr. Harris's argu- 
ment was a partial one, but it had truth in it. There are many teach- 
ers who are at their ripest and at their best between 65 and 75, and 
such men of course ought to remain in their profession." — "The Moral 
Influence of a University Pension System," by Henry S. Pritchett, 
Popular Science Monthly, New York (1911), p. 511. 

IIO 



SUPERANNUATION OR SERVICE BENEFIT 

the retention of employees in special eases for an additional 
period not to exceed five years. 8 The names of the employees 
thus retained have to be reported to Parliament. In connec- 
tion with this experiment, it is interesting to note that Sir 
Francis Mo watt of the treasury, who had had long experi- 
ence in connection with the administration of the English 
system, advised against such a power of extension because, 
as he expressed it to an investigating commission, "you would 
buy the retention of the services of one or two efficient men 
for a few years at the expense of being saddled with the serv- 
ices of a large number of men who are no longer efficient." 9 
Provisions making certain reductions in the benefits if men 
are retained after 65 have, however, been introduced which 
tend to prevent abuse of the privilege. Unless properly safe- 
guarded, the device would probably lead in this country to 
the retention of employees who had influence or who were 
in the more important positions. 10 

8 The English system permits retirement at 60 and makes it com- 
pulsory at 65 except as above indicated. 

9 Second Report, Royal Commission on Civil Establishments, Brit- 
ish Parliamentary Papers, 1888, Vol. XXVII, p. 159, q. £4,717. 

10 The following testimony of Lord Claud Hamilton, chairman of 
the Great Eastern Railroad, given before the Royal Commission on 
Superannuation in the Civil Service (British Parliamentary Papers, 
1903, Vol. XXXIII, p. 57, q. 1691) is perhaps suggestive, though funds 
in private establishments can operate without compulsory retirement 
ages much more successfully than can government systems, because 
the private administrator has greater incentive to force retirements 
than has a public administrator and is generally less subjected to 
improper influences. 

"What we do — and I do not think any other company does it — we 
have got what is called an 'Old Age Committee, which meets once 
every two months, and every servant of the company who is over the 
age of 66 has to appear before the directors accompanied by the head 
of his department. The directors then see them, talk over their condi- 
tion of health and their abilities with the head of the department 
and either say they remain in for another year and come up again, 
or for two years and come up again, as the case may be, and in that 
way we see the whole of our old servants about once a year — all the 
men over 66 — and, I am happy to say, so healthy is the railway service 
. . . that we have a considerable number of men between 75 and 80 
still in our wages list, whose health is sufficiently good to enable them 
to perform their respective duties." 

Ill 



RETIREMENT OF PUBLIC EMPLOYEES 

Optional Retirement After Fulfilling Minimum Conditions 
and Compulsory Retirement After Fulfilling Maximum Con- 
ditions. Optional retirement on fulfilling certain minimum 
conditions and compulsory retirement on fulfilling - others seem 
to constitute the best compromise device, with possibly a pro- 
vision for limited retention above the compulsory age, if that 
can be properly safeguarded. Such conditions, on the one 
hand, recognize that men fail at different ages and, on the 
other, protect the government against the danger of prolonged 
retention in office of incapacitated men. Such conditions may 
result in a certain type of hardship in exceptional cases if men 
retain their full usefulness to advanced age, but such cases 
are probably relatively infrequent, and the hardship can last 
but a few years. Generally, moreover, such men can soften 
it by devoting their last years to some private activities in 
which they have long been interested. The opportunity that 
it promises for leisure to devote to one's hobbies is perhaps 
the most attractive feature of a superannuation benefit. 

Age or Service, or Age and Service Conditions. After a 
decision has been reached regarding the general type of con- 
dition to be prescribed for a superannuation benefit, the next 
question is whether these conditions shall be based on age 
only, on service only, or on the two combined. 
Age If all new employees enter the service at about the same 

Preferable a S e > ^ e distinction between a service condition and an age 
condition is perhaps of relatively little importance and an age 
condition is preferable, as it simplifies actuarial computations ; 
but, if the ages of new employees vary very much, even five 
years, a service condition is objectionable. If a long period 
of service is required, the employee who enters late in life will 
be a very old man before he is eligible to retire; and, if he 
becomes inefficient before fulfilling the service conditions, he 
will probably be continued on the active roll. If, on the other 
hand, a short period of service only is required, with the idea 
of permitting the late entrant to retire at a reasonable age., the 

112 



SUPERANNUATION OR SERVICE BENEFIT 

young entrant will be permitted to retire at the very prime 
of life. For example, if thirty-five years of service is re- 
quired, the man who enters at forty cannot be retired until 
he is seventy-five. If the service requirement is reduced to 
twenty-five years to permit him to retire at sixty-five, the man 
who enters at twenty can retire at forty-five. Elaborate pro- 
visions can be introduced requiring longer service from young 
entrants than from older ones, but, on analysis, these will be 
found to rest in reality upon an age basis. Everything would 
be much simplified if the requirement was to rest on age di- 
rectly instead of indirectly. 11 

The employees in some branches of the government ad- Unwar- 
vance the contention that the work is so wearing that an em- JJelnand 
ployee's usefulness is destroyed after a certain number of for Retire- 
years' service regardless of his age. A patient reading of short 
voluminous masses of pension evidence leads one to the con- Service 
elusion that it is a recognizable human weakness for a man 
to regard his own calling as one involving peculiar hardship 
or danger or as being exceptionally wearing. Individual in- 
stances of death, accident, disease or nervous breakdown will 



11 "It would appear that in a department with a wide range between 
the minimum and maximum age limitations for entrance into the 
service the requirement of a stated uniform number of years of serv- 
ice before retirement is impracticable as a means of humanely elim- 
inating teachers who have passed the period of usefulness." — Report 
on Teachers' Retirement Fund; The Mayor's Commission on Pen- 
sions, New York, 191 5, p. 16. 

"Provision has been made for full pension after only twenty years' 
service for instance, though the employee might then be but 40 years 
of age and fully able to perform his duties for many years to come. 
This abuse is chiefly found in plans for pensions for members of a 
very small class only — such as firemen for instance. It is often 
defended on the ground that the work is arduous and perilous; but, 
the former calls for shorter hours of time and the latter for adequate 
provision for compensation for injuries and death. Neither can 
justify or excuse a pension plan which retires a man when his value 
is greatest and involves an addition to the compensation for his 
services which would be intolerable if applied to all civil servants." — . 
"Governmental Methods of Providing Old Age Pensions," by Miles 
M. Dawson; International Congress of Actuaries VII, Amsterdam, 
1912, p. 209. 



"3 



RETIREMENT OF PUBLIC EMPLOYEES 

be cited as conclusive proof of the assertion. Statistical data, 
suitable for determining the relative probability of death, acci- 
dent or disease, are strikingly absent; or, if introduced, are 
presented by some hard-hearted actuary or statistician who 
thinks figures covering the whole field are more significant 
than individual cases full of human appeal. It is the same 
old phenomenon of the exaggerated importance of the isolated 
instance. Before a government commits itself to a policy per- 
mitting retirement after a term of service so short that it will 
allow some employees to become pensioners in middle life, it 
should have supporting evidence in conclusive statistics, col- 
lected and compiled by an impartial, scientific statistician or 
actuary. No matter how long a man may have been in the 
service, his personal observations are of little value quantita- 
tively. He cannot realize how many are exposed to risk and 
how long they are exposed, and, consequently, he cannot tell 
how frequently cases like those of which he speaks occur in 
relation to the whole group of employees nor has he had ex- 
perience in other lines of activity. A large body of adequate 
quantitative material bearing on occupational mortality, acci- 
dent, and disease is gradually being accumulated, and to such 
actual data and to men experienced in their use legislators 
should turn for real information regarding the effects of an 
occupation on health rather than to the testimony of inexpert, 
interested witnesses. Legislative bodies owe a particular duty 
to the public not to establish a system which will permit able- 
bodied employees to stop work in middle life to live at the 
expense of society or to become subsidized competitors for 
those few private occupations which are open to persons of 
their age. 

General observation, and that quality which is termed "com- 
mon sense" would suggest that an age basis for conditions is 
much the wiser. It operates in harmony with natural laws. 
In consequence, all the computations necessary to enable the 
government to determine what its retirement system is actually 
costing are vastly simplified because methods for measuring the 

114. 



SUPERANNUATION OR SERVICE BENEFIT 

operation of natural laws are well worked out and are rela- 
tively simple. 

A minimum service requirement can, of course, be included Minimum 
in a system that is otherwise based on age. Such a provision quirement 6 " 
somewhat increases the cost of the actuarial expenses of man- 
agement or reduces the accuracy of the computations. With 
a compulsory age of retirement, it results indirectly in the 
establishment of a maximum age at entrance; and the simpler 
course would be to establish that maximum directly. Under 
a system without a compulsory age, or under a system with a 
minimum permissive age and a maximum compulsory age, it 
may result in the retention of a man who is already superan- 
nuated to enable him to qualify for a benefit. The advisability 
of including such a limitation is to be determined somewhat 
by the amount of the benefit and the method of determining 
it, but it can be laid down as a general principle that no condi- 
tion should be established based on service if the same gen- 
eral purpose can in any way be accomplished through condi- 
tions based on age. 

Factors Involved in Deciding Upon Retirement Age. The 
exact age conditions to be prescribed will depend primarily 
on the requirements of the work and the costs of the system, 
though the interests of the employees and of the general public 
must, of course, be considered. 

In respect to their requirements, government functions may 
be broadly divided into two classes, those which demand physi- 
cal activity and bodily strength, and those which need mainly 
mental activity. Mental activity, it is generally recognized, Nature 
continues much later in life than physical activity, and fre- 
quently in retirement systems a younger retirement age is 
prescribed for what may be termed the athletic services, such 
as the fire department and the police department, than for 
the more sedentary services, such as that of the clerks in public 
offices; but these differences have been based on general ob- 
servation and on more or less relevant testimony advanced 

US 



of Work 



RETIREMENT OF PUBLIC EMPLOYEES 

by each group of employees in seeking their own retirement 
rather than on any thorough study of facts. Large govern- 
ment units could with profit make special studies of their own 
forces with two objects in view: first, to determine to what 
extent formal arrangements can be made for transferring per- 
sons who are superannuated for branches of the service re- 
quiring great physical activity to positions in other branches 
for which they are not superannuated; and, second, to get 
accurate data regarding the ages at which superannuation 
actually does occur with facts regarding its causes. 
Possi- To what extent it would be possible to utilize in other 

Transfer branches of the government, the services, for example, of 
policemen or firemen who have passed the physical prime of 
life, it is impossible to say offhand; it is a subject requiring 
investigation. To the administrator accustomed to taking new 
employees from a civil-service register of eligibles established 
through tests designed to meet more or less closely the special 
requirements of the work which he has to do, the scheme sug- 
gests a loss in efficiency. He fears, for example, that a re- 
tired policeman may not do a type of work within his qualifi- 
cations quite so well as a younger man specially selected for 
the particular task. The real question, however, is rather one 
of general social efficiency. Possibly the younger man can 
do the work more efficiently, but the difference may not be 
large enough to compensate society for the cost of having the 
younger man do it, while the older man, perhaps only a little 
less able, is supported in idleness on a superannuation benefit. 
In several countries of continental Europe, a similar problem 
on a large scale has been encountered in connection with the 
non-commissioned officers of the army. They must be kept 
in the army for a number of years to assist in training the 
successive classes of privates, but as the work requires great 
activity and as it is desired to train many such officers, they 
have to be retired early. One solution has been to make a 
careful survey of governmental activities and to reserve abso- 
lutely for these men such positions as they are obviously fitted 

116 



SUPERANNUATION OR SERVICE BENEFIT 

to fill ; and to give them preference for certain other positions 
if they can pass prescribed examinations. A position is not 
guaranteed each man, and the opportunities are awarded on 
the basis of merit. The non-commissioned officers strive to 
attain them and presumably study to fit themselves for the 
work. English observers reporting on the operation of the 
various systems commend them. 12 The point is made that the 
men who have thus been trained and disciplined are in great 
demand, not only for public positions, but for private employ- 
ment, as they have profited from their experience physically, 
mentally and morally. Though such a system might not be 
effective in this country in dealing with parts of the service 
that require physical activity, it is at least worthy of considera- 
tion. It would probably necessitate some reduction in the 
average age of retirement from the earlier service, so that the 
man could enter upon his new duties at an age when he could 
more quickly acquire proficiency in them. Such a provision 
might, moreover, be to the distinct advantage of the earlier 
service, as it would eliminate any twilight zone between the 
prime of physical activity and a reasonable age for superan- 
nuation retirement. 13 The present difficulty is that each branch 

12 Reports from Her Majesty's Embassies in Austria-Hungary, 
France, Germany and Italy as to the Civil Employment of Soldiers and 
Sailors on completion of Service. — In British Parliamentary Papers, 
1893-94, Vol. LXXXIX, p. 1 147. 

13 "3103. With regard to the light work which you spoke of just 
now as being the work upon which you employ your men over 50 
years of age, is not that work looking after stations, and so on, work 
which must be done? — It is necessary, no doubt, but it is also ex- 
tremely inconvenient at those times of pressure which occur in 
every community, that those men cannot be told off for special work. 
3104. Is not a man who is ordinarily employed on light work, capable 
of doing some special work upon some extra occasions? — He might 
be; I could put my finger on some who are capable and some who are 
not. 3105. But taking the average of the men in your force, if they 
have good health and do not meet with any accident, surely from 
50 to 60 they would be able to go on ordinary work ? — They may or 
may not. I would very much prefer having stronger men." — Mr. W. 
K. Wait, M.P., Chairman Watch Committee of Bristol, testifying 
before the Select Committee on Police Superannuation Funds, Brit- 
ish Parliamentary Papers, 1875, Vol. XIII, p. 125. 

117 



Improve- 
ment of 
Working 
Conditions 



The Cost 
of the 
Benefit 



RETIREMENT OF PUBLIC EMPLOYEES 

of the public service regards itself as an independent unit and 
strives for its own independent retirement system. To bring 
about correlation is a long, slow process. The latest English 
parliamentary bills dealing with superannuation, introduced 
after over a century of experience, have been directed toward 
so correlating the retirement schemes that a man may pass 
from one branch of the imperial service to another without 
sacrificing retirement privileges. In this country the improve- 
ments that can be made in government service through the 
general principle of correlation are, of course, enormous. 

Real data on the subject of the age at which superannuation 
occurs would not only be of value in determining a proper 
age for a retirement system, but properly analyzed, with spe- 
cial reference to cause, it might prove of marked social value 
in suggesting means whereby superannuation could be re- 
tarded through changes in working conditions. So-called wel- 
fare work is becoming a feature of many large corporations, 
and scientific studies of the employees of the government made 
by the public health authorities would be of general public 
value. Such studies would, of course, bring out the differ- 
ences in superannuation ages in different types of service, 
which is the first factor that has to be considered in fixing 
the age conditions for a superannuation benefit. 14 

The second factor that has to be considered in fixing the 
retirement age is the cost of the superannuation benefit. The 
lower the retirement age the greater is the cost ; and even very 
slight reductions in age make startling increases in cost. A 
diagram showing the age distribution of the employees of an 
ordinary service of any size generally takes the form of a 
pyramid with a few old employees at the apex and a great 



14 Operating retirement systems on the actuarial reserve basis neces- 
sitates the collection and tabulation of data regarding the ages at 
which men retire as superannuated. Such data, supplemented by- 
medical examinations and reports, could be made of great value in 
studying methods of delaying the outset of superannuation. They 
would also permit of the gradual adjustment of the retirement condi- 
tion to the exact needs of the service. 

118 



SUPERANNUATION OR SERVICE BENEFIT 

body of young new entrants at the base. As one passes from 
the apex of this pyramid toward its base, the age diminishes 
and the number of employees in each successive younger age 
grows larger. Each year therefore that is taken off the retire- 
ment age adds a larger increment to the number to be retired 
than has been added by any previous reduction of a single 
year. Not only does it add to the number to be retired imme- 
diately and annually thereafter, but it adds a year to the period 
during which retirement allowances will have to be paid to 
the group of employees who would have been retired at the 
later age. Under a wholly or partly contributory system it 
not only increases the number of years retired employees will 
draw benefits out of the fund, but it reduces the number of 
years during which they will make payments into it and dur- 
ing which the whole accumulation will draw interest. The 
annual interest earned of course grows markedly greater in 
each successive year the fund is permitted to accumulate un- 
disturbed. A reduction in age of retirement therefore reduces 
assets and increases liabilities. Whether the system be con- 
tributory or non-contributory, the matter of a year more or 
less is never something to be lightly regarded ; a difference of 
a very few years may almost double the cost of the system. 

The views of the employees are a much more reliable guide Value of 
in the selection of a superannuation retirement age if the sys- o/Eml""" 1 
tern planned is wholly or partially contributory than if it is Payees 
non-contributory. If none of the burdens are to fall directly 
and obviously on the employees, their attitude, though seldom 
so ingenuously expressed, is likely to be that of the English 
postman who told an investigating committee, "We think that 
a man has to work too long to get a pension ; we do not think 
he gets a sufficient pension when he does get it, and we think 
there is a very large number of men who do not get pensions 
who ought to get pensions." When the employees face the 
questions of costs as a matter of individual expenditure, they 
may be excellent judges of the extent to which the prospect 
of early retirement is worth what it costs in present sacrifices. 

119 



RETIREMENT OF PUBLIC EMPLOYEES 

The The interest of the public as a whole is probably that every 

o?the StS man S ^ a ^ k e productively employed so long as he is able to 
Public work. Any provision that enables a man to retire to idleness 

at an early age while still fully efficient is, accordingly, con- 
trary to public interest. It can be justified only if the retire- 
ment of the particular employee permits the organization he 
leaves to increase its public service, to an extent which will 
more than offset the cost of retiring the employee. Legisla- 
tion which will permit a special class to live in idleness at an 
age when most men are still working is presumptively con- 
trary to public policy, and demands absolutely conclusive evi- 
dence for its justification. 15 

The Amount of the Superannuation Benefit 

Three Divisions of Subject. The amount of the superan- 
nuation benefit to be provided is the next important question 
after the general conditions upon which such a benefit is to 

15 "The teachers who have retired on the ground of age have 
averaged between sixty-nine and seventy years of age, a result that 
was anticipated, since sixty-five was expected to be only a minimum 
age limit. So far as the life of this foundation has gone, its experi- 
ence shows that a teacher does wisely to continue his work as long 
as good health and strength remain. In the first sensation of con- 
nection with a pension system, the idea of retirement at sixty-five has 
evidently presented itself as very attractive to a number of men, but 
the experience of the six years makes it clear that on the whole this 
age is probably too low a limit. This inference is borne out by the 
large number of applications from retired teachers who, after a year 
or two of absence from regular work, are ready and anxious to get 
back once more into the work of the teacher. The experience of six 
years enables the officers and trustees of the foundation to realize, 
as they could not realize before, that the value of the pension to the 
man who approaches sixty-five lies not in the opportunity to escape 
from active work at that age, but in the protection afforded whenever 
the period of usefulness and strength has passed by. That teachers 
are realizing this more and more is also apparent — in the main and 
so far as general results go, this rule has worked well. It has worked 
no demoralization, and while some men today would be better off 
in their old places in the classroom than on the retired list, on the 
whole the rule has abundantly justified itself." — Seventh Report of 
the Carnegie Foundation for the Advancement of Teaching, New 
York, 1912, p. 82. 

120 



SUPERANNUATION OR SERVICE BENEFIT 

be granted have been decided upon. It is, perhaps, one of 
the most difficult and complex problems that those responsible 
for the establishment of a retirement system have to solve; 
and in an attempt to simplify it, it will here be considered 
under three separate heads, but, of course, these three divisions 
are more or less arbitrary and to a certain extent overlap one 
another. They are : ( i ) the relationship between the amount 
of benefit and the amount of wages or salary; (2) the rela- 
tionship between the amount of benefit and the length of serv- 
ice, and (3) the relationship between the amount of benefit 
and the social and economic needs of the employee. 

The Amount of the Superannuation Benefit and the Amount 

of Salary 

The Classes Described. In relation to salary, the amount 
of the superannuation benefit may be ( 1 ) entirely independent 
of salary; (2) directly dependent on salary, or (3) indirectly 
dependent on salary. 

Three systems giving superannuation benefits entirely inde- independent 
pendent of salary may be clearly distinguished : ( 1 ) the dis- of Salar y 
cretionary system which leaves the amount to be paid to the 
decision of the administrators; (2) the so-called "flat pension 
system'' which provides a uniform amount for each employee 
and (3) the flat contribution scheme which provides that a 
fixed sum shall be paid annually by each employee or on his 
account and the benefit shall be the amount which these annual 
payments will purchase. 

Systems providing a direct relationship between the amount Directly 
of benefit and the amount of salary may be divided into two ^s^iar"* 
broad classes: (1) those which base the benefit on the 
salary earned throughout service, generally spoken of as 
"average salary plans" or sometimes as "total salary 
plans," and (2) those which base the benefit on the salary 
earned by the employee in the latter years of his serv- 
ice, generally spoken of as "terminal salary plans." Three 
variations of the terminal salary plan are encountered. Un- 

121 



RETIREMENT OF PUBLIC EMPLOYEES 

der the first, the benefit is based on the salary the man is earn- 
ing on his retirement ; under the second, on the salary that he 
was earning in a certain year, a fixed number of years before 
his retirement, and under the third, on the' average salary that 
he earned for a given number of years immediately preceding 
his retirement. 
Indirectly The general principle of the plans providing for an indirect 

on^Salary* relationship between the amount of salary and the amount of 
benefit is that contributions, bearing some fixed relationship 
to salary, shall be made by or in behalf of each employee each 
year and that the amount of benefit shall be what these annual 
contributions will purchase. Schemes of this nature are sus- 
ceptible of a good many variations, and in describing some 
of the more important ones the employee will be spoken of 
as paying the contributions, but it must always be remembered 
that the scheme is equally applicable regardless of who makes 
the payments. 

Perhaps the simplest form is the one in which each em- 
ployee pays annually a fixed percentage of his salary. 
Substantially the same results are attained if the employees 
are divided into classes according to salary and each employee 
in a given salary class pays a certain fixed amount, the exact 
amount being higher for each higher salary class than for 
the one below it. A more elaborate development provides that 
the percentage which the employee is to pay throughout his 
service shall be determined by his age at entrance. A still 
more elaborate development provides that the percentage fixed 
at the time of the employee's entrance shall apply only to the 
amount of salary that he received at entrance and that in re- 
spect to each increase of salary a new percentage shall be 
applied, determined by his age at promotion. 

The proponents of retirement legislation thus have a wide 
choice, but, of course, the various schemes are by no means 
of equal worth. Their merits and defects can perhaps be most 
easily considered in the order in which they have been thus 
briefly described. 

122 



SUPERANNUATION OR SERVICE BENEFIT 

The Discretionary Sum Independent of Salary. The discre- objections 
tionary sum independent of salary is open to essentially the cretionarv 
same objections that were discussed under discretionary re- Pensions 
tirement conditions (page 105). Power to fix the amount 
of the retirement allowance is desired mainly by persons in 
superior positions or by governing boards to permit of greater 
control over the destinies of employees. The inclusion of such 
powers arises from the conception of a retirement system as 
a charity or philanthropy or as a system of special awards 
for meritorious conduct. Not infrequently such a system re- 
sults in consideration of an employee's needs or of his per- 
sonal virtues and his morality. Acts of misconduct, which 
were punished, presumably adequately, at the time they were 
committed will be reviewed and possibly the offenses of the 
last few months will be taken into consideration without any 
regard to the long record of past services. Such a system is, 
of course, susceptible to a vicious application of the spoils 
system and leads the employees to retire at the moment they 
believe the arbiters are likely to make them a generous award 
or to hang on in the active service after superannuated from 
fear that the time is not propitious. Instead of settling 
definitely that old age will be provided for in a certain fixed 
way, the employees have a new, artificial uncertainty added to 
the natural uncertainties of life. The whole trend of mod- 
ern thought is, of course, against such legislation, and it is 
doubtful if at the present time a general discretionary pro- 
vision would be considered, but one to establish maximum and 
minimum limitations within which the benefits must lie might 
be advocated to enable a distinction to be made between the 
highly meritorious employee, the average employee, and the 
inferior employee. 

In connection with the establishment of a maximum and Maximum 
minimum provision, the testimony of Sir C. E. Trevelyan of j^ um l"^. 
the English treasury given before the Select Committee on itations 
Civil Service Superannuation of 1856 is of interest. He 
said: 

123 



RETIREMENT OF PUBLIC EMPLOYEES 

"For many years I was an advocate for the treasury's 
retaining the power of making what I may call a minute 
adjustment [between the merits of the employee and the 
amount of the benefit]. I am not now speaking of en- 
tirely withholding pensions, or of giving good service 
pensions, but of adjusting the rate of pensions within 
the limit of the maximum rates authorized to be granted 
by law at the end of the service. For many years that 
seemed to me a very salutary provision, but I found that 
it was very generally objected to; in fact, I never found 
anybody not at the treasury who approved of it. For 
many years I argued for it and supported it strongly, 
but at last I found it was impossible to conquer the gen- 
eral dislike with which that provision was regarded and 
in course of time came to the conclusion that as this 
power is exercised by the treasury, within the walls of 
the treasury, upon data known only to the treasury and 
the grounds upon which these fine distinctions are made 
could not be generally known, it was impossible to obtain 
the general confidence of the service in the exercise of 
this power. I found that the officers in the same depart- 
ment were constantly comparing the different cases and 
saying so and so was at least as good as such another, 
why was a distinction made." 16 

In any large service a maximum and minimum provision 
Difficulty would seem to be open to this insuperable objection. If the 
istratian 11 " amount is to be varied in accordance with the merits of the 
employee, some central agency for determining the amount 
is necessary if any uniformity of consideration is to be se- 
cured throughout the service, and no central agency can easily 
be possessed of or be put in possession of all the facts, and, 
consequently, arbitrary rules have to be adopted giving certain 
fixed weight to certain selected indices. These rules and regu- 

16 British Parliamentary Papers 1856, Vol. IX, p. 75, q. 605. 

124 



ity 



SUPERANNUATION OR SERVICE BENEFIT 

lations can be worked out beautifully for the average or ordi- 
nary employee, but there is inevitably the exceptional case; 
and a few exceptional cases, one way or the other, are suffi- 
cient to cause that general distrust and dissatisfaction that 
C. E. Trevelyan encountered in trying to administer the dis- 
cretionary provisions of the English system. To one who is 
familiar with the extent to which in this country political in- 
fluence is exerted to affect administrative action, the ob- 
jection that can be advanced on that score alone seems suffi- 
cient to kill any discretionary feature. It should, however, 
be added in conclusion that any discretionary power to vary 
the amount of benefit decreases the actuarial soundness of the 
system. 

The Fixed Amount Independent of Salary. The "flat pen- of Limited 
sion," or, in other words, the fixed amount independent of App' icabl1 " 
salary, is almost invariably a small sum. It may be only a 
grant in aid of support or a sum little above the minimum 
of subsistence. It cannot exceed the salary of the lowest paid 
employee, without producing an intolerable situation, the pay- 
ment of more to retired old men who have few dependent 
on them than is paid to the younger active employees, who on 
the average have more and younger dependents. Unless all 
salaries or wages are about equal, it involves an inequality 
in sacrifice upon retiring, as between different grades of em- 
ployees. The more highly paid, more successful men, would 
complain because relatively more is done for the unsuccessful 
employee than for the successful. Unless a compulsory age 
of retirement was established, all the more highly paid men 
would remain in the service as long as they could hang on, and 
their fellow employees in responsible positions would hesitate 
to take action for their retirement. With a compulsory age 
of retirement, the small fixed sum might promote saving and 
thrift on the part of the more highly paid, more ambitious 
men, but it would also tend to drive young, ambitious men 
away from the service to seek positions under other employers 

125 



RETIREMENT OF PUBLIC EMPLOYEES 

where no compulsory retirement age was prescribed or where 
more generous benefits were allowed on retirement. As a pro- 
vision for a permanent retirement system, the fixed amount 
for a superannuation benefit therefore has little to commend 
it unless practically all employees receive about the same wage 
or salary at retirement age. 

Of Limited The Fixed Contribution Independent of Salary. A pro- 

Apphcabil- v i s i on f r the contribution of a fixed sum annually by each 
employee to purchase for him such a benefit as it will, is pos- 
sibly a feasible plan in a service in which all enter young and 
attain to about the same salary grade by the time they reach 
the retirement age. If any considerable number of employees 
enter late in life, the scheme is impracticable. A contribution 
which will provide a sufficient superannuation benefit for the 
young entrant, who makes payments for many years and de- 
rives much help from the factor of interest, will be entirely 
insufficient to give an adequate allowance to the older entrant 
who makes payments for only a few years and derives scant 
help from the factor of interest. If the contribution be raised 
to a point at which it will provide for the care of the older 
entrants, it becomes burdensome on the younger entrants as 
they are forced to accumulate a sum which will provide an 
allowance far in excess of their needs, possibly even a sum 
in excess of their active salary. If the ultimate salaries 
vary materially, the scheme involves great inequalities in the 
rate of sacrifice, even if the men all enter at about the same 
age. The scheme is, therefore, open to some of the objections 
that apply to the benefit of a uniform sum for all. 

A Natural Benefits Directly Dependent on Salary. The superannua- 

te^ op- t j oji b enen j. directly dependent on salary was, perhaps, the most 
natural one to be selected in the establishment of a non- 
contributory system operated on the assessment or cash dis- 
bursement basis; that is, under a primitive system that paid 
pensions as they came due out of current revenues. It in- 

126 



SUPERANNUATION OR SERVICE BENEFIT 

volved a fairly nearly equal proportionate sacrifice on retire- 
ment for all employees, especially if based on terminal salary. 
Not unnaturally, too, as the retirement movement developed, 
this feature was adopted for partially contributory systems and 
for systems which were established to operate on an actuarial 
reserve basis or on what was believed to be an actuarial re- 
serve basis. It is, however, now regarded by some authorities 
as being- open to very serious defects, because, if the system 
is on the actuarial reserve basis, or if it requires the em- 
ployees to bear a certain proportion of the cost actuarially de- 
termined, it requires the actuary to predict, on the basis of 
the present or the immediate past, what the salaries of the 
employees are to be in the future. As the actuary would ex- 
press it, if the superannuation benefit is a function of salary, 
a salary scale has to be used. 

The Salary Scale. The general nature of the simpler type 
of salary scale, which is sometimes used by actuaries in dealing 
with very large forces, is really not at all a difficult thing for 
the non-actuarial mind to grasp, especially if broadly described 
without any attempt at actuarial niceties. Roughly speaking, 
the actuary collects data regarding the age and salary of each 
present employee, or of each employee of the past few years, 
and he finds through the use of average salaries by ages what 
the rate of percentage increase in salary has been for the aver- 
age employee, as he passed from age to age. When this branch 
of the computation is completed, he has a series of ratios which 
represent the yearly percentage increase in the salary which 
has taken place for employees at each age. He then assumes 
that the rates of change thus indicated will probably represent 
the change that will take place in the future as the employee 
passes from the earlier age to the later. To facilitate the 
use of these ratios of percentage of increase, the actuary some- 
times assumes a rate of salary for the youngest age represented 
among the employees, and by increasing this amount by use 
of the rate of increase he produces a table or scale of salaries 

127 



RETIREMENT OF PUBLIC EMPLOYEES 

for all ages. Refinements are of course introduced. The rates 
of increase are graduated to eliminate idiosyncracies that may 
arise from the use of small numbers, and the actuary not in- 
frequently makes discretionary adjustments to allow for 
changes that can be anticipated or for known defects in the 
basic data. Sometimes the employees have to be divided into 
classes and a separate set of rates produced for each separate 
class, to make allowance for the great differences in rates 
of advancement in different occupations. The description 
given above indicates, however, in a very general way, the 
nature of the salary scale. 

In dealing with some forces, this simpler method is in- 
applicable, because the conditions of the service may be such 
as to demand the construction of salary scales which take into 
account not only the employee's age, but his length of service, 
or in certain important divisions of the service classes of em- 
ployees may progress and others not. The actuary, therefore, 
in some cases has to resort to a more complicated method. 
The essential points are ( i ) that under any method the salary 
scale is based on averages and cannot be used to show the 
actual increase in the safery of any individual employee, since 
some employees progress more rapidly than the average and 
others less, and (2) that it assumes that the general rates of 
progress can be estimated from the situation existing in the 
present, or that did exist in the immediate past. 

Objections to the Use of the Salary Scale. In opposition 
to the establishment of a scheme requiring the use of salary 
scale, four principal objections may be advanced, which can 
be summarized as follows : 

1. It introduces an unstable element into the system. 

2. It interferes with the introduction of administrative 

changes. 

3. Under a contributory system, it introduces an element 

of unfairness as between classes of employees and as 
between individual employees of the same class. 
128 



SUPERANNUATION OR SERVICE BENEFIT 

4. Under a contributory system, it necessitates changes in 
the rates of contribution from time to time. 

As most persons agree, in a general way, that some relation- 
ship between salary and superannuation retirement benefit is 
desirable in a complex service, these objections to the tech- 
nical method, which has to be used to provide a direct rela- 
tionship in a system to be operated on the scientific actuarial 
reserve basis, demand special consideration. 

The persons who maintain that a salary scale introduces 
an unstable element into the fund take issue with the assump- 
tion that the rates of salary change as shown by a study of introduction 
the present force or of the force of the immediate past can ° f , Unstable 
be safely used as a basis for anticipating future rates of 
changes. Against this assumption, four principal arguments 
may be introduced. 

First, the economic forces upon which the general level of 
wages and salaries depend are not in condition of stable equi- 
librium, but they may change considerably, sometimes almost 
without warning, so that the rates for one year are different 
from those for the next. Salaries, however, especially gov- 
ernment salaries, are less susceptible to violent fluctuations, 
but they may vary considerably over periods of years, as they 
are influenced by such fundamental forces as the supply of 
and demand for labor and the supply of and demand for 
money in its broad sense. In other words, the actuary who is 
forced to establish a salary scale is not dealing with the re- 
sultant of forces that are in fairly stable equilibrium, as he is, 
for instance, when he considers mortality rates, but he is deal- 
ing with the resultants of forces which are in unstable equi- 
librium and which may each act differently in times of eco- 
nomic crises, economic depression, economic expansion or 
war and the difficult financial readjustments that follow it. 

Second, the relative importance of different classes of em- 
ployees, grouped together in forming the salary scale, in order 
to get a sufficient body of data with which to work, may 

129 



RETIREMENT OF PUBLIC EMPLOYEES 

change materially. Not infrequently in commercial under- 
taking's, more low grade positions are created without a cor- 
responding increase in the number of administrative heads, 
and as a result, the average salaries in the future will not rise 
so much as the salary scale would suggest. Not infrequently 
the actuaries make an arbitrary adjustment in the scale to allow 
for this probability. In the government service, new higher 
grade positions may be created without a corresponding in- 
crease in the lower grades, as the government enters new fields 
of activity. If great numbers of persons are already em- 
ployed, averages may not be greatly affected unless a very 
large new service is added; but, if the number of employees 
is small, a large addition may materially change the salary 
scale. 

Third, movements for salary changes may be successful. 
Sometimes these movements apply to all employees and some- 
times only to a particular group. Sometimes they seek a uni- 
form proportionate increase for all involved, sometimes for 
a total readjustment of the salary grades and classes. Changes 
of this nature cannot be anticipated by the actuary in estab- 
lishing a salary scale. 17 

Fourth, the elimination of the superannuated and the dis- 
abled through the introduction of a retirement system in the 
government service will undoubtedly increase the rapidity of 
promotion, and more men will reach the higher positions than 
was the case before a system was introduced, and they will 
reach high positions at younger ages. 

To guard against the instability that may result in the sys- 
tem because of these four factors, and possibly others, con- 
stant watch has to be kept over the fund, and if actual experi- 
ence shows that the salary scale was only imperfectly ap- 
plicable, changes in the rates of contribution under the scheme 

17 The "equal pay act" by which the salaries of men and women 
teachers of the New York schools were equalized resulted in an in- 
crease in the liabilities of the retirement fund. See Report on the 
New York School Teachers' Retirement Fund, New York, 1915, p. 93. 

130 



SUPERANNUATION OR SERVICE BENEFIT 

have to be made to remedy the defects developed, or else the 
government may have to make heavy payments under its 
guarantee of solvency. Under a contributory scheme, an in- 
crease in rates is, of course, unpopular, whereas a decrease is 
popular, but knowledge that the scheme provides for a possible 
change of rates to employees already in the service causes dis- 
trust, and furnishes a ground for opposing the legislation 
establishing the system that finds a fairly general response 
among younger employees. 18 

The second fundamental argument advanced against the Interference 
use of a salary scale is that it interferes with the introduction ™ trat j ve min " 
of administrative changes. The need for thorough revision Changes 
of the antiquated scheme of salary classes at present in use 
by the Federal Government, to make it fit the conditions 
brought about by the partial abandonment of the spoils system 
and the introduction of the merit system, and to establish a 
much closer relationship between the work which the employee 
does and the compensation which he receives is, of course, 
notorious. If, however, a retirement system, providing a su- 
perannuation benefit directly related to salary and operated 
on the actuarial reserve basis, were in effect in the United 
States service, this necessary reform could not be undertaken 
without involving the whole financial condition of the fund. 
The Congress might find in the financial deficit, which would 
be created in the retirement system reserve funds, a strong 
argument for preserving the existing status. In public serv- 
ices, in general, it is probably true that the need is rather for 
making salaries and wages more immediately responsive to 
changes in general economic conditions than for making them 
less responsive by introducing new forces that tend to rigidity. 

The third argument against the use of a salary scale, — that 
under a contributory system it introduces an element of un- 

18 The right to change the rates in respect to future entrants is of 
course necessary. If changes become necessary in respect to em- 
ployees already in the service the cost should perhaps be borne by 
the government. See discussion, p. 100. 

I3 1 



RETIREMENT OF PUBLIC EMPLOYEES 



The Intro- 
duction of 
an Element 
of Unfair- 
ness as 
Between 
Employees 



fairness as between classes of employees and as between indi- 
vidual employees of the same class, — has its origin in the fact 
that the salary scale is based on averages. It assumes that 
the salaries of all employees will advance at exactly the same 
rate as the salaries of the average employee. Unless the office 
has a uniform system of salary increases, based solely on 
length of service, this assumption is far from the truth; gen- 
erally, certain groups of employees have little chance to ad- 
vance far above the entrance salary, whereas for another 
group the chances may be very great. 19 Technically the two 
groups may be scarcely distinguishable; they may work side 
by side in the same office, yet the general difference may 
be well understood among the employees themselves. Since 
the rates of contribution for the two classes of employees are 
alike, on the assumption that both will receive advancement 
at the average rate, and will leave on a retirement allowance 
based on the entrance salary increased by average rates of 
promotion, the least favored group will pay for more than 
it receives, because it did not advance at the average rate; 
whereas, the most favored group will pay for less than it 
receives, because it advanced at a rate above the average. An 
employee who receives rapid promotion comparatively late in 
his active career will contribute on the basis of his high salary 
for a short time only, whereas the one who rose to the top 
early in service contributes on the basis of his high salary for 
a very considerable period, yet, if both retire on a superannua- 
tion benefit directly related to terminal salary, each will receive 
substantially the same benefit, though one paid more for it than 
another. To the group of employees who are least successful 
and who have received few if any promotions, it seems like a 
case of "unto him who hath shall be given and from him 



19 For tables contrasting the changes in average salaries, according 
to age and according to service, for different classes of employees 
in the Federal Government see "Statistics of Employees, Executive 
Civil Service," by Lewis Meriam, Bulletin 94 of the U. S. Bureau 
of the Census, Washington, 1908, pp. 42 and 44. 

132 



SUPERANNUATION OR SERVICE BENEFIT 

who hath not shall be taken away even that which he hath." 20 
Three answers have been given to the employees who have 
advanced this sort of argument, and mention of them should Three 
be included. The first is that all employees start with an equal Argumerrtof 
opportunity for advancement and, therefore, each has an equal Unfairness 
chance of being the winner at the expense of the others. Such 
an answer rarely appeals to the aggrieved class, as they regard 
the equality as purely theoretical; and, although cases can be 
pointed out where exceptionally brilliant employees, entering 
without special training and without the advantages of educa- 
tion, have risen to the top, yet the employees recognize that 
general rule of life which results in the establishment of edu- 
cational systems and leads to the prescription, by civil service 
commissions, of educational tests for the better grade posi- 
tions that offer the brighter chances for advancement. They 
prefer to have the equality offered to them based on the gen- 
eral rule, and not on the exception. The second answer is 
given under a partially contributory system. It is that the 
benefit which the employee gets is at least as much as his 
own contribution without any grant from his employers would 
purchase, and that is all he can demand as a right. The con- 
tribution of the employer, it is argued, is made to the fund, 
not in behalf of each individual employee as a distinct unit, but 
in behalf of the whole body of employees as a class and, there- 
fore, the employer has a right to distribute his contributions 
among the employees as he sees fit. The employees on enter- 
ing, it is argued, know the conditions laid down by the system ; 
it is part of their contract of employment; and they have no 
proper ground of complaint. If it is clearly demonstrated 
that the employee does get all he himself paid for and if at 
the outset the employees distinctly understand that the gov- 
ernment pays little or nothing for the retirement of the men 



20 For evidence showing strong feeling in this matter, see the Report 
of the Committee of the Board of Trade on Railway Superannuation 
Funds, British Parliamentary Papers, 191 1, Vol. 29, especially the 
testimony of Mr. A. G. Walkden, p. 18. 

133 



RETIREMENT OF PUBLIC EMPLOYEES 

who do not advance above the entrance salary, whereas it pays 
a very large amount for the men who are highly successful, — 
under a terminal salary plan a startlingly high amount for 
the man who is successful in the very last years of his career, 
— the scheme may be defensible on the equitable ground of 
notice. From the social point of view, it seems a queer pro- 
cedure. The poor man has a far smaller margin than the 
rich man between earnings and the minimum of subsistence, 
yet the government does relatively more for its well-to-do em- 
ployees than for its poor ones. The third answer may have 
more weight than the others, but it needs further investigation 
and it is not necessarily applicable to all schemes. It is that 
the lower paid employees become superannuated and retire at 
an earlier age than the more highly paid ones, and, hence, they 
make fewer contributions to the fund and receive more retire- 
ment benefits from it. In other words, their superannuation 
benefits are relatively more costly than those of the more suc- 
cessful men. This answer was given to employees of private 
companies under schemes which had no compulsory retire- 
ment age, and in which the higher employees were the ones 
who decided who was superannuated. It is questionable how 
far it would be applicable in a government system in which 
retirement at a fixed age was compulsory and in which men, 
if not women, would tend to remain until the compulsory age, 
unless actually forced out by the condition of their health. 21 



21 This question of the equities as between different classes of em- 
ployees was one of the issues between the railroads and their em- 
ployees in the hearings before the Board of Trade Committee on Rail- 
way Superannuation Funds. The concensus of opinion among the 
actuaries seemed to be that the inequities complained of by the lower 
grade employees were apparent rather than real. The actuaries' 
reasons are summarized above. Persons interested in retirement 
funds, either public or private, will find this report on Railway Super- 
annuation Funds, both the report itself and the testimony, an illumi- 
nating document. It is a model investigation. The work of the com- 
mittee was greatly strengthened because it had as a member an experi- 
enced actuary, Mr. Duncan Fraser, who directed the taking of the 
actuarial testimony very ably. See British Parliamentary Papers, 
1910, Vol. 57, and 191 1, Vol. 29. 

134 



SUPERANNUATION OR SERVICE BENEFIT 

The final argument against the use of the salary scale is that Necessity 
it necessitates changes from time to time in the rates of con- * or J* ead ~, 

° justment or 

tribution under a contributory scheme. This difficulty is not Rates 
insurmountable because the government can guarantee the 
salary scale in respect to present employees and make good any 
deficits arising from the general treasury. It need not formally 
reserve in its retirement legislation any right to change rates 
in respect to future entrants because such a right is one which 
the legislative body could not abrogate. The question is one 
of how far guaranteeing is advisable; the government may 
guarantee nothing or it may guarantee an interest rate, mor- 
tality rate, withdrawal rate, salary scale and all the other rates 
that the actuary has to use in working out an actuarially elab- 
orate scheme. 

In concluding the discussion regarding salary scale, it may Statement 
be well to quote the statement of Mr. William Sutton, Actu- William 
ary to the Central Office of the Registry of Friendly Societies, Sutton 
in advising the Select Committee on School Board (London) 
Superannuation Bill in 1891, 22 advice which ultimately re- 
sulted in the establishment of the English Elementary School 
Teachers Deferred Annuity Fund, a system in which the 
amount of benefit is absolutely independent of salary, being 
the annuity which a fixed annual contribution will buy, sup- 
plemented by a grant from the government. 

"It may be said that with few exceptions superannua- 
tion funds as generally constituted are radically wrong 
in principle when looked at from the actuarial point of 
view. Instead of resting content with the introduction 
of as few assumptions as possible, they are made to in- 
volve not only assumptions as to the rates of mortality 
to be experienced among the members and as to the rate 
of interest to be earned by the accumulated funds — these 
may be fairly said to be indispensable — but they are also 

22 British Parliamentary Papers, 1890-Qi, Vol. XVII. o. 134. 

135 



RETIREMENT OF PUBLIC EMPLOYEES 

made to depend upon such capricious elements as the rates 
of secession of members (that is of members leaving 
active sendee, otherwise than by death or retirement) and 
the rates of salary the members will receive and on which 
the nature and amount of their contributions to the fund 
will depend as well as the amount of the pension they 
will receive. It thus follows that in bringing into the 
question of rates of secession and rates of salary, mat- 
ters which cannot be prognosticated with any certainty 
for any length of time classes of members get lumped to- 
gether whose real circumstances and conditions in respect 
of these matters are as different as possible. In the par- 
ticular case now before the committee this would certainly 
seem to apply. Thus, for instance, it appears to have 
been considered that a large proportion of teachers with 
comparatively small salaries would secede in the early 
years of membership, whereas it may be on the other 
hand safely inferred that members of the official staff 
as distinguished from the teachers' staff would rarely 
secede. Again, by fixing a uniform percentage deduc- 
tion from salaries the further assumption is implied, con- 
trary to the facts, that all members of the fund will have 
their salaries uniformly and proportionately increased 
throughout membership, with the result that the classes 
of members where salary only rises to a small extent, 
or is practically stationary, will be called upon to pay 
heavier contributions to meet the shortcomings of those 
whose salaries have throughout membership steadily if 
not heavily increased. Put in another wa}', this is ex- 
actly one of the financial blunders which has been more 
or less the cause oi the downfall of countless friendly 
societies. 

"There is the further objection that all schemes of this 
kind, if properly considered, seriously hamper the admin- 
istrative body to which the members of the fund are sub- 
ject. For instance, it may be considered expedient by 

136 



SUPERANNUATION OR SERVICE BENEFIT 

that body to raise the age of admission in a certain class 
of its members, a step probably very wise but which may 
be of serious menace to the superannuation fund. On the 
other hand, the same body of men may consider it de- 
sirable to compulsorily retire a certain class of members 
at an earlier age than that contemplated in the finances 
of the fund." 

The principal reason for favoring a direct relationship be- The 
tween the amount of superannuation benefit and the amount salary** 
of salary is, as mentioned above, to provide an equality in Plan 
the rate of sacrifice on retirement for all classes of employees, 
on a money basis. This argument, if allowed to dominate, 
would lead to the establishment of a superannuation benefit 
based on the salary of the last year, as that involves the least 
change from a man's standard immediately prior to his re- 
tirement. Such a provision gives maximum weight to all the 
objections urged against the salary scale, because it decreases 
the stability of a fund on the actuarial reserve basis, it inter- 
feres with administrative changes, it introduces an element of 
unfairness as between different classes of employees and dif- 
ferent employees of the same class, and under a contributory 
system it necessitates a reservation of a right to change the 
rates or a government guarantee that may result in fairly large 
payments. It may lead, moreover, to the making of promo- 
tions to high positions the year immediately preceding the 
age of retirement or the expected retirement so that the fa- 
vored employee may have a high benefit. Certain positions 
with good salaries attached might be reserved as sort of a 
gang plank across which many would pass in leaving the active 
rolls to go on the retired list. 23 It also tends to discourage any 

23 "The plan of basing the pension on the last annual salary received 
is not one to be recommended in connection with these funds; for 
when the pension is to come out of a fund, and not directly out of 
the employee's pocket, a man's salary is often raised before his 
retirement to enable him to retire on a substantial pension ; and it is 
generally the highly paid officials who are thus treated. This is some- 

*37 



RETIREMENT OF PUBLIC EMPLOYEES 

reduction of salary or any assignment to lower grade work, 
in the case of employees who are still very useful but are not 
able to continue to bear the full responsibilities of their posi- 
tions, because any reduction would mean an unfair reduction, 
lasting throughout life, in the amount of the superannuation 
benefit. 24 
Two Varia- To obviate these objections, two variations of the terminal 
Terminal salary plan have been tried or suggested : ( i ) basing the 
Salary amount of superannuation benefit on the average salary earned 

in a certain number of years immediately preceding retire- 
ment, and (2) basing the amount of the benefit on the salary 
earned in a certain year, a fixed number of years before the 
last. Obviously the longer the period over which the average 
salary is taken, the less become all the dangers of the terminal 
salary basis. The scheme to base the benefit on the salary of 
a year a certain number of years before the last has been 
suggested for use in private superannuation retirement systems 
where no compulsory age is introduced and where employees 
fear the danger that their compensation may be deliberately 
reduced in the last years of service for the sake of keeping 
down the cost of their retirement. 23 In the government service 
where this danger is not likely to arise and where compulsory 



times mitigated by basing the pension on the average of the year's 
salary; but a much better plan would be to base it on the salary 
received three years before retirement." — "Staff Pension Funds," by 
H. M. Manly in the Journal of the Institute of Actuaries, Vol. 36, 
1901-2, p. 241. 

21 The following extract from the Report of the Committee on 
Railway Superannuation Funds is of interest in this connection : 
"Under the average salary system an apparent hardship is imposed 
in . . . cases of reduction of salary from the consequent reduction 
in the members' pension, and this is accentuated when the pensions 
are given on the last seven years' average system. In certain of the 
guaranteed funds there is a rule that if the salary of any member shall 
be at any time reduced, he shall be entitled to continue his contribu- 
tions based on his salary as unreduced and to receive benefits on the 
like basis. "We consider that this rule is an eminently fair and just 
one which it might be well for all the funds to adopt." — British Parlia- 
mentary Papers, 1910, Vol. 57, p. 26. 

25 See note 23, page 137. 

138 



SUPERANNUATION OR SERVICE BENEFIT 

retirement ages are probably more necessary, this scheme 
seems to have no advantage over the average salary of the 
last years. Both represent a departure from the ideal held 
by some of a proportionately equal money sacrifice for all 
employees of the same length of service upon retirement. 

Basing the benefits on the average salary throughout serv- The 
ice represents a still further abandonment of this ideal. It Si Jia" ge 
reduces to a minimum the objections against the employment pIa n 
of the salary scale, and is less open to the objection that im- 
proper promotions will be made toward the end of service 
or that the scheme will result in holding men at the very high- 
est positions to which they ever attain until they are eligible 
to retire, regardless of any decrease in their capacity to fill 
them. Since the salaries for a large number of years are aver- 
aged, what may be done in the last few years of service has 
relatively little effect on the final result. If economic changes 
of one kind or another take place, or if administrative changes 
are made, the cost of the benefits due the older men will be 
very little affected because their salaries will be subject to 
these changed conditions for only a few years, and, if the 
right to alter the rates of present employees is reserved, the 
rates for the younger employees can be so adjusted as to over- 
come the financial difficulties introduced by the change. Of 
all the schemes providing a direct relationship between salary 
and benefit, it is the one that results in the least connection 
between the salary that the man is earning on the day he re- 
tires and the benefit that he receives as a retired employee, but, 
on the other hand, it is the soundest scheme providing a direct 
relationship with salary and the fairest one as between dif- 
ferent classes of employees and different members of the same 
class. 

Benefits Indirectly Dependent on Salary. Benefits indi- Method of 
rectly dependent on salary are provided, as has been previously °P eratlon 
explained, by making the annual contributions paid by the em- 
ployee or on his behalf, bear a fixed relationship to the amount 

139 



RETIREMENT OF PUBLIC EMPLOYEES 

of his salary, and by having the amount of the benefit deter- 
mined by the purchasing power of these annual contributions. 
The amount of the contribution may be so fixed by the 
founders of the system that the benefit will be just about what 
they think it should be in the average case. In cases which 
depart from the average, the benefit which the employee gets 
will also depart from the average. Each employee receives 
an exactly equal value for his contributions or for the con- 
tributions made in his behalf. In fact, the indirect relation- 
ship scheme is sometimes contrasted with the direct by saying 
the indirect results at retirement in equality of return, the 
direct, in equality of sacrifice. 

The indirect relationship scheme is sometimes spoken of 
as a savings bank scheme, or a compulsory savings and annuity 
scheme, as generally it is at least partially contributory and 
often provides for a return of contributions in event of the 
employee's death or withdrawal from the service. The gen- 
eral nature of such schemes can perhaps be made clear most 
easily by describing a simplified one, in which all the funds 
are assumed to be contributed by the employees, each of whom 
pays a contribution of a fixed percentage of his salary each 
month, which is deposited in the fund to his account to accu- 
mulate at compound interest. If he dies in the active service, 
resigns for any cause, or is dismissed, the whole of his accu- 
mulations with compound interest, at the rate earned by the 
fund, is returned to him or his representative. If he survives 
in the service to the retirement age, the amount then standing 
to his credit with all the interest that it has earned is used 
to purchase for him such an annuity as it will for the balance 
of his life. The amount which he will receive as an annuity 
will depend on three factors : ( i ) the size of his annual contri- 
butions; (2) the rate of interest which is being earned by 
the accumulations; and (3) the rate of mortality among the 
annuitants, or retired employees, upon which would depend 
the number of payments that would have to be paid. 

Such a system would obviously introduce a minimum 

140 



SUPERANNUATION OR SERVICE BENEFIT 

amount of financial instability into the fund, since the only Maximum 
actuarial assumptions which would have to be made would stability 
be the rate of interest to be earned by the fund after the re- 
tired employee enters upon his annuity and the rate of mor- 
tality among the retired employees. The government could, 
without involving itself in very heavy liabilities, guarantee a 
conservative rate of interest. The rate of mortality can be 
fairly accurately determined in advance through a thorough 
investigation of the past experience of employees of that par- 
ticular class. The rate of mortality, as especially determined 
for a given class of employees, living under more or less the 
same conditions in respect to occupational risks and other eco- 
nomic and social conditions, is determined mainly by the opera- 
tion of natural forces which are in a state that approaches 
stable equilibrium. General mortality tables applying more 
or less to men of all occupations and industries can even be 
used at the outset, but they are of strictly limited applicability 
and have to be selected and used by an expert, because, even 
if devised as a basis for the sale of annuities, they may not 
represent conditions which will exist in a particular group 
of public employees. If made up as a basis for life insurance 
premiums, they are almost totally inapplicable unless a wide 
margin of correction is applied. If a life insurance company 
uses a mortality table giving too high a death rate, it is safe 
because the number of death claims it would have to pay might 
be reduced and the time at which it would have to meet the 
claims would be postponed, and hence its losses would be less, 
but if an annuity fund used that same table, it would go bank- 
rupt because it would have to pay its annuitants more times 
than it figured on paying them, since they would live longer 
than the table indicated. If the mortality table is properly de- 
veloped from past experience, or even if conservatively se- 
lected from existing data, the fund established as described 
on the indirect relationship to salary basis should be absolutely 
sound and should remain sound with less readjustment than 
any other general type except a straight compulsory savings 

141 



RETIREMENT OF PUBLIC EMPLOYEES 



Absolute 
Equality 
of Return 



Objections 
to Method: 
Insufficiency 
of Benefit 



system, which gave on retirement not an annuity, but merely 
the total amount of the accumulation. 

That it produces absolute equality among the employees is 
one of the principal arguments in favor of such a system. If 
two men of the same age each contribute a dollar, and if both 
retire at the same age, each gets the same amount of annuity 
or benefit for that dollar, though the first be an unskilled 
laborer whose wages have been the same throughout his serv- 
ices and the second one of those rare exceptions who rise from 
a job as messenger boy to occupy in the last few years of his 
career one of the highest positions in public employment. If 
all contributions made by the employee or in his behalf are 
repaid to him or to his representatives on death or withdrawal, 
or if accruals to the fund by deaths or withdrawals are equita- 
bly distributed among the survivors, this system produces 
equality of return because each gets what his own money, or 
his own money plus his share of the profits, will buy. 

The principal argument advanced against this system, 
broadly speaking, is that it will only produce the desired benefit 
in the average case, and the exact average case may occur very 
rarely. In numerous instances, men may retire before the 
average age and before they have served the average number 
of years and in these cases the amount of annuity available 
for them will be small. They will have made few contribu- 
tions and those they have made will have been at interest but 
a short time; and an annuity, with first payment beginning 
at an early age, is very expensive because many payments will 
probably be required. If the attempt be made to meet these 
cases of early retirement by raising the contribution rate, the 
rate becomes prohibitively high, and in case of men who stay 
beyond the average age or serve longer than the average num- 
ber of years yields a far greater benefit than is needed. The 
man who remains long in the service obviously makes many 
contributions and receives much assistance from the accumu- 
lating power of compound interest which adds larger in- 
crements to a man's accumulations in each successive year, and 

142 



ability 
Provision 



SUPERANNUATION OR SERVICE BENEFIT 

consequently, when he reaches an advanced age he has a rela- 
tively large sum to purchase an annuity and at that age annui- 
ties are cheap. He gets, therefore, a larger annuity than he 
needs. Since he has paid for it himself, it is hardly fair to 
say that it is larger than he should have, except, perhaps, from 
a very extreme social point of view. 26 

This objection manifestly precludes the selection of this Inapplicable 
type of system for use by itself in providing a disability bene- 
fit, for the man disabled in early life cannot possibly have his 
whole future provided for by the little he is able to save from 
his salary in the first few years he is in the public service. For 
a disability benefit some form of insurance has to be provided, 
so that the many who are fortunate enough to escape disa- 
bility in the early years of life will pay, directly or indirectly, 
for the few who have to be retired because of accident or dis- 
ease. But the fact that a mechanism devised to provide a 
superannuation benefit in a retirement system will not also 
provide a disability benefit is not a conclusive argument against 
it, because the different benefits can easily be provided in dif- 
ferent ways and all can be combined in a single system which 



26 The following quotation from testimony of Mr. T. G. Ackland, 
F.I.A., given before the Committee on Railway Superannuation Funds, 
is a typical illustration of this criticism (British Parliamentary 
Papers, 191 1, Vol. 29, p. 200, q. 5400) : 

"I consider that on the whole the average salary basis is best 
adapted to the circumstances and working of the Superannuation 
Fund of a railway company, although in the case of funds established 
in connection with private firms or commercial companies or munici- 
pal boroughs, I have found the 'final salary' basis or the average of 
the last seven years' salary to work well and equitably. I regard the 
'average salary' basis as a sort of compromise between the extreme 
cases of (1) the 'money value' basis where there is equality of return, 
and (2) the 'final salary' basis where there is equality of rates of 
sacrifice. The 'money value' basis operates unfavorably against those 
who retire early from breakdown or at the earliest optional age, giv- 
ing them quite inadequate pensions whilst, on the other hand, they 
who retire very late in life receive under this system unduly high 
pensions. The 'final salary' basis on the other hand operates un- 
favorably to men of low salaries as compared with those of high 
salaries, especially if the latter have been obtained by large incre- 
ments as the retiring age was approached." 



143 



RETIREMENT OF PUBLIC EMPLOYEES 

will be easy to operate. Each mechanism should be considered 
on its merits as a means of providing not a complete system 
of benefits but one specific benefit. The question of adjust- 
ing a superannuation benefit indirectly dependent on salary to 
a disability benefit directly dependent on salary or entirely 
independent of it can be considered to better advantage in the 
chapter on disability benefits. 
Weight of Th e extent to which the superannuation rules must permit 

Objections . . . . . , 

variation from average conditions obviously determines the 
weight which should be given this main objection against 
basing the amount of benefit on the amount of contributions 
in devising a superannuation retirement system. If the super- 
annuation rules permit a fairly wide variation between the 
earliest age at which a man may retire and the maximum age 
at which he must retire, or, if they do not provide for com- 
pulsory retirement, the argument may have a good deal of 
weight, provided the variation is required for the welfare 
of the service. If, on the other hand, early retirement is not 
permitted on a superannuation benefit, but can take place only 
on a disability benefit after medical examination and, if the 
difference between the permissive age and the compulsory age 
for superannuation retirement is not great, the argument, it 
would seem, could be more or less disregarded. The case of 
the man who remains after the minimum age, or after the 
average age, can, moreover, be met by the device used in the 
plan for Massachusetts state employees of having all contri- 
butions stop when an employee fulfills a certain period of 
service. From that time on his benefit increases only from the 
interest earned and from the decreasing price of annuities. By 
such a provision and by prohibiting early retirement except for 
proved physical or mental disability, this objection is largely 
overcome. 27 

Two other arguments are advanced against this system of 
basing benefits on the amount of contributions, first, that it 

27 See Report of Massachusetts Commission on Pensions. Massa- 
chusetts House Document, No. 2450, Boston (1914); P- 1 9 2 - 

144 



SUPERANNUATION OR SERVICE BENEFIT 



does not give a large enough benefit to the man who enters 
the service at a late age and, second, that the relationship 
between the amount of benefit and the salary is not sufficiently 
close. These objections can be overcome in part by the intro- 
duction of one of the more elaborate variations of the scheme. 
They are chiefly applicable to a system that establishes a uni- 
form percentage of contribution applicable to all employees 
regardless of their age on entering the service, or its equiva- 
lent, the scheme which divides the employees into classes by 
salary and requires from all in the same salary class the same 
amount of contribution regardless of their age on entering 
the service. 

The percentage of salary to be contributed by or in behalf 
of each employee may be determined by his age at entrance 
into the service. The actuary can figure these percentages in 
such a way that if the employee enters at the specified age 
and remains to a given age and advances according to the 
average rate in salary, the retirement benefit will bear the 
desired proportion to either the average salary or some form 
of the terminal salary. In other words, he can work out 
the same premium rates, or rates of cost, that he would use 
in establishing a superannuation benefit directly dependent on 
salary and these rates could be paid by each employee. In 
those cases where the history of the employee conformed to 
the averages as used by the actuary, the benefits would be the 
same as they would have been under the other system, but 
in those cases where the history did not so conform differences 
in the benefit would arise. The employee who left before 
the average age would get less than the average benefit and 
the one who remained longer would get more. The man who 
progressed more rapidly than the average would get less bene- 
fit in proportion to his final salary than the man who did not 
progress so rapidly, because no portion of the contribution 
made by the less successful man would be utilized to pay bene- 
fits to the more successful. No danger to the solvency of 
the scheme would result from such a use of the salary scale 

MS 



Elaborations 
Suggested to 
Overcome 
Objections 



RETIREMENT OF PUBLIC EMPLOYEES 

in fixing on the rates of contribution because the employee 
would never be promised a definite proportion of any salary; 
he would be promised merely the amount his contributions or 
the contributions made in his behalf would buy. No change 
in salaries, therefore, could affect the liabilities of the system. 
Another variation is to fix the percentage to be contributed 
at entrance at such a point that if the employee remains with- 
out promotion to the assumed retirement age he will receive 
a benefit of a fixed proportion of his entrance salary. If an 
employee is promoted, the amount of the promotion is sub- 
ject to a new percentage, namely, the rate which would have 
been charged a new employee joining the force at that age. 
In other words, a higher rate is charged on each promotion 
than was previously charged. Such a procedure obviates the 
necessity for using a salary scale, and it takes no more from 
the salary of the man who does not advance than is necessary 
to provide the precise superannuation benefit that is regarded 
as necessary. He does not come out at the end with a benefit 
that is larger in proportion to his salary than that which the 
other men receive. When the employees are promoted, their 
increase in salary brings not only the necessity for paying a 
larger premium but also the means of paying it. After a cer- 
tain age, however, this process would become impossible be- 
cause the cost of a proportional addition to the benefit would 
be greater than the amount of the increase in salary. 
Elaboration Against these various schemes, basing the amount of benefit 
ccounts Qn ^ accumu i a tj ns, the objection is sometimes raised that 
they necessitate keeping an individual account for each em- 
ployee and, in case of this last scheme, where each promotion 
means a change in the percentage of contributions, these indi- 
vidual accounts might become extremely complicated. 28 An 

28 The Departmental Committee on Superannuation of Teachers in 
Public Elementary Schools (British Parliamentary Paper, 1895, Vol. 
LXXVI) recommended against the proposal to have teachers con- 
tribute in proportion to the excess of their salaries over certain 
amounts partly on the grounds of the complication of accounts. See 
p. lu of their report. 

I46 






SUPERANNUATION OR SERVICE BENEFIT 

objection of this kind can hardly be considered on the broad 
basis of general principles, as it involves matters of rather 
minute detail. In all probability, any retirement system scien- 
tifically administered will require an elaborate system of rec- 
ords. The administration of the retirement system should, 
however, be closely related to the civil service commission or 
other selecting agency and to any division of standardization 
of personnel and one report from a department or office of a 
change in personnel should furnish the basis for the records 
of each of them. Whether a particular retirement device will 
involve so great an additional cost of administration as to 
make it of doubtful value is one that must be considered in 
each particular instance by the actuary, working in close 
association with the numerous governmental officers in- 
volved. 

In connection with this question of complication of adminis- 
tration, one device, used at least in part of the English civil 
service, is of interest. Certain deductions have to be made 
from the salaries of the employees to pay the income tax, and 
the employee can authorize the government to pay for them 
certain life insurance premiums. To avoid a multiplicity of 
detailed deductions, the government pays at the regular 
monthly pay days a fixed proportion of the salary somewhat 
less than one-twelfth. At the end of each quarter, a consider- 
able sum has been withheld from each employee. From this 
sum all the deductions are made quarterly and the employee 
is then given the balance. 29 Under such a system, the machin- 
ery for the regular salary payments is no more complicated 
than under an ordinary system providing for no deductions. 
All deductions could be made quarterly or semi-annually. By 
the introduction of some such device the problem of operat- 



29 "A civil servant only gets 8 per cent of his salary each month, and 
gets his balance, minus income-tax and other deductions at the end 
of the quarter." — Mr. John J. Duffy, testifying before the Royal 
Commission on Civil Service, Fourth Report of the Commissioners, 
British Parliamentary Papers, 1914, Vol. 16, p. 209, q. 2j, 476. 

147 



RETIREMENT OF PUBLIC EMPLOYEES 

ing a contributory system with varying payments by each em- 
ployee could doubtless be worked out at a fairly reasonable 
cost. 

The Amount of the Superannuation Benefit and Length of 

Service 

The relationship between the amount of benefit and the 
length of service is the second of the three broad divisions into 
which the question of the amount of benefit has been divided 
to facilitate discussion. It is, of course, closely connected 
with the first, which has just been considered, the relationship 
between the amount of benefit and the amount of salary or 
wages. In a system that requires certain annual contributions 
by or in behalf of the employee and bases the amount of the 
benefit on the purchasing power of these contributions, a rela- 
tionship between the size of the benefit and the length of 
the service is manifestly natural and inevitable, because the 
longer a man serves the more payments he will make, the 
more interest his payments will earn, and, as he grows older, 
the less a life annuity will cost. In such systems, moreover, 
the relationship is not only inherent in the scheme, but the 
exact extent of it is largely fixed by mathematical laws. In 
the other systems the existence of a relationship is optional, 
and the extent of any relationship can, to a considerable de- 
gree, be determined by the persons who establish the system. 

Defects of The Desirability of Relationship. The reason why some 

Establishing relationship between the amount of superannuation benefit 
Relationship anc [ ^he i en gth of service is desirable can perhaps be most 
easily brought out in a negative way, by considering the de- 
fects of a system which does not provide one, but gives the 
same benefit to all, or to all of a given salary class, regard- 
less of the time they have served. Under a contributory sys- 
tem providing equal benefits for all regardless of service and 
requiring a uniform contribution, or rate of contribution, from 
all regardless of age or length of service, the man who enters 

148 



SUPERANNUATION OR SERVICE BENEFIT 

young and stays to the retirement age pays far more than is 
necessary to raise his own benefit; the surplus goes to pay 
for the benefit granted the man who entered at a more ad- inequitable 
vanced age and has not had time to contribute the cost of his 
own retirement. Under such a system the young entrant pays 
the cost of retiring the older entrant. An attempt may be 
made to overcome this difficulty by requiring the older entrant 
to pay a higher premium, but the highest premium the oldest 
entrant can afford to pay will not purchase a benefit that is 
sufficiently large to meet the average requirements of a re- 
tirement system, if there be much difference in age between 
young entrants and old entrants. If all enter at about the 
same age and retire at about the same age, a sort of natural 
service relationship exists; but, if such is not the situation, 
the allowance for the older entrants with shorter service has 
to be reduced, so that the small benefit paid to that class may 
be the exception, and the larger, more satisfactory benefit paid 
the younger entrant with longer service may be the rule. 

This objection probably applies, though possibly with less 
force, to a non-contributory system providing benefits the 
amount of which is not related to length of service. The 
young entrants will have a grievance that those who worked 
but a few hours receive the same reward as those who toiled 
through the heat of the day. Socially and economically speak- 
ing, the younger entrants probably deserve more, for not only 
have they earned it, but all their provisions for old age must 
come from this one employment whereas in many cases the 
older entrants may, or perhaps should, have made some pro- 
vision in the years before they entered the service. 

A further danger arising from an absence of relationship Early 
between the amount of benefit and length of service is that Encouraged 
if the system permits the employees any option regarding re- 
tirement, it places a premium on retiring early. The actual 
salary to be earned becomes the only inducement to remain in 
harness, since increased service means no increase in superan- 
nuation benefit. If any option regarding age at retirement is 

149 



RETIREMENT OF PUBLIC EMPLOYEES 

introduced, an increasing benefit with increasing length of 
service may be regarded as imperative to overcome the opera- 
tion of a sort of economic law or law of nature which makes 
the difficulty of securing new employment increase with in- 
creasing age. A pension independent of service tempts a man 
to retire at the earliest possible moment so that he may enter 
some new employment which, with his superannuation benefit, 
will give him a good living. If his earnings in his new em- 
ployment plus the amount of his benefit is the least bit greater 
than his active salary, he can figure an immediate financial 
profit from the change, and sometimes when the new combina- 
tion does not show a monetary advantage the employee may 
consider it for his best interests, as it may have better pros- 
pects of lasting for life. An employee who thus retires to 
take up other pursuits becomes a subsidized competitor against 
other old men, and the creation of such a class must be guarded 
against by offering the employees an inducement to refrain 
from exercising their option to retire so long as they are still 
able to perform the duties of their position. An alternative 
remedy sometimes suggested is to prohibit the employee re- 
tired on a superannuation benefit from entering any gainful 
occupation, but such a procedure is not only the imposition 
of a cruel and unnatural penalty on the employee, it is con- 
trary to that public policy which demands that for the good 
of society we shall all be productively employed so long as we 
are able to produce. 
Relationship A relationship between amount of superannuation benefit 
Necessary an( j i etl gth of service may, therefore, be regarded as neces- 
sary to do justice between the employee who has served a long 
time and the one who has served only a short time and to offer 
the employees an inducement to render long service. 

The Two Methods of Establishing Relationship. Two general 

Methods methods of introducing a relationship between amount of the 

Described ° . x . 

benefit and length of service may be tried. First, the 
amount of benefit may be determined by the amount of the 

150 



SUPERANNUATION OR SERVICE BENEFIT 

contributions paid by or in behalf of the employee, and thus 
a relationship based mainly on the operation of mathematical 
laws will automatically arise, and, second, an arbitrary scale 
of increases may be provided. To describe all the various 
arbitrary scales of increasing benefits that ingenious persons 
may devise is clearly impossible. Perhaps the commonest 
form is to grant a certain proportion of salary for each year 
of service, sometimes with a maximum limitation, especially 
if no compulsory age of retirement is fixed. The English 
Superannuation Act of 1859, for example, granted "To any 
person who shall have served ten years and upwards and un- 
der eleven years an annual allowance of ten-sixtieths of the 
annual salary and emoluments of his office. For eleven years 
and under twelve years, an annual allowance of eleven-six- 
tieths of such salary and emoluments; and in like manner a 
further addition to the annual allowance of one-sixtieth in 
respect of each additional year of such service until the com- 
pletion of a period of service of forty years when the annual 
allowance of forty-sixtieths may be granted; and no addition 
shall be made in respect of any service beyond forty years." 
The act of 1909 substituted eightieths for sixtieths and 
granted certain new benefits that compensated for the change. 
In the earlier act forty years' service gave a retirement allow- 
ance of two-thirds pay; in the latter, only half pay. Another 
scheme tried has been not to make a change each year, but 
to establish wide steps such as half pay after thirty years' 
service and before forty years, two-thirds pay after forty. 

The system that bases the amount of benefit on the pur- Basing 
chasing power of the contributions, as was discussed more at Benefit™ 
length in the preceding section, has two marked advantages; Purchasing 

...... , . Power of 

it enables each employee to get the same proportionate return Contribution 
for his contributions, and it may easily be made financially 
sound, because it is actuarially simple. It places a great Merits 
premium on remaining in the service until the compulsory age ^"elects 
of retirement, because the amount of benefit which the contri- 
butions will purchase increases each year at a rapidly accelerat- 

151 



RETIREMENT OF PUBLIC EMPLOYEES 

ing rate. This feature is, indeed, one of the chief grounds 
for objecting to it; it is said that it may offer too great an 
inducement to hang on, because each additional year means 
such a great increase in superannuation benefit or conversely 
because early retirement involves so great a loss. It necessi- 
tates, too, a high scale of contributions, if the man who re- 
tires at the minimum age is to receive a reasonable benefit. 
Under some of the other systems, the man who retires early 
does so at the expense of him who remains longer, but under 
this system each man pays for himself alone. These objec- 
tions can, to a certain extent, be overcome by having a fairly 
narrow margin between permissive age and compulsory age 
for retirement and by having compulsory contributions stop 
at the minimum age if the superannuation benefit has reached 
a certain minimum amount. 
Elaborations Further elaboration of the scheme by having the interest 
to Overcome eam ed revert to the fund if an employee were continued after 
the general retirement age is conceivable, though contrary to 
the general theory of equality of return on which schemes of 
this type have been based. Such a device would be equivalent, 
perhaps, to a rapidly progressing reduction of salary for all 
who remained after the general retirement age, but it would 
be disguised, for the man retained would continue to draw 
the same active salary but would lose the steadily increasing 
interest on his retirement accumulation. If some satisfactory 
way of apportioning this interest, after it was actually earned 
and in hand could be worked out, so that it would be used 
for the benefit of those who were forced to retire early, the 
device would seem to have some merit. It would increase 
the amount of benefit to those who retired early ; and it would 
do so entirely at the expense of those who remained beyond 
the general retirement age. A lower compulsory age of re- 
tirement could be adopted with a provision like that now in 
the English civil service that in special instances men might 
be retained for an additional period not to exceed five years. 
During this five years their retirement allowance would in- 

152 



SUPERANNUATION OR SERVICE BENEFIT 

crease somewhat because their expectation of life would be 
shortening, but they would know that the interest from their 
accumulation was being used for the fund as a whole and 
not for them. If it were desired to put further check on con- 
tinuation beyond the general age, deductions might be con- 
tinued beyond that age and be paid to the fund as a whole. 
Possibly at the outset the receipts from this source might be 
made a special fund managed by trustees elected by the em- 
ployees and reporting to them and be used within certain gen- 
eral lines in their discretion, more or less as the English civil 
servants have established benevolent funds which meet the 
needs of special cases not adequately provided for by the in- 
creasingly rigid administration of a retirement system. The 
special advantages of such a device would be that, since the 
grants would not be made until the interest was earned and 
in hand, it would not enter into the calculations to establish 
and maintain the financial solvency of the fund, and the cost 
would not be distributed over all the employees as an insur- 
ance premium, but would be borne solely by those who were 
so exceptionally fortunate as to keep health and strength be- 
yond the general average. One obvious defect of the device 
is that for the first few years of the system the fund would 
have no profit from this source, and the first few classes of 
early superannuation retirements would derive only their exact 
rights. Profits or dividends arising from such a source could 
not be promised as absolute rights; to preserve financial 
solvency they would have to be in all respect contingent, but, 
after the fund had been in operation for a long time, an em- 
ployee might be able to judge with some fair degree of ac- 
curacy what he would probably receive from this source in 
case misfortune necessitated early retirement. Democracy 

of administration with full publicity of action would have to . . 

Determining 

be relied upon to prevent abuse. the Amount 

The arbitrary scale system has perhaps two advantages and £~. Z^ 
three principal disadvantages. The first advantage is that Arbitrary 
by introducing an insurance element it permits all to get a scale 

153 



RETIREMENT OF PUBLIC EMPLOYEES 

reasonably satisfactory benefit for a smaller contribution. It 
does this by giving the employee who retires early more than 
he would have received for his contributions under the other 
system, and it is able to do so because it takes from the em- 
ployee who retires late in life something which he would have 
Merits received under the other system. The second advantage, which 

Defects ma }' P rove a doubtful one, is that it permits the persons plan- 

ning the scheme to make it conform to what they conceive 
to be the exact needs of the service. The first objection is 
that an arbitrary scale more or less complicates the actuarial 
work and adds new elements of financial instability. If forces 
arise that lead to increased and unanticipated retirements in 
the early years of life, the proportion of retirements in later 
life will be necessarily reduced and that nice balance between 
profit from the long sen-ice man and loss from the short serv- 
ice man will be disturbed, and readjustment will be necessary. 
The actuary must either anticipate how the retirements are 
likely to occur or else assume that all will occur at the earliest 
age. If he assumes that all will occur at the earliest age, 
he will have to provide for a fairly large premium, thereby 
more or less sacrificing one of the advantages of the plan, 
and he will have to provide for distributing profits or else 
for a subsequent reduction of rates to employees who ma3^ 
not have contributed to the profits that permit reduction. The 
second objection is the loss of equality of return with the 
introduction of a possible danger that clean-living, energetic 
men, anxious to work so long as they are able, may have to pay 
for the early retirement of the lazy, the anxious-to-retire, and 
the dissipated. The third objection is that the supposedly ideal 
device for having benefits increase with service may not oper- 
ate at all as its creators anticipated. One elemental rule must 
be reckoned with in planning such devices, namely, that the 
dominating force governing the great majority of employees 
is, not unnaturally, self-interest. Because of this fact, long 
periods between increases in benefits are undesirable. They 
result in a marked tendency toward selection against the sys- 

154 



SUPERANNUATION OR SERVICE BENEFIT 

tern. The great majority of retirements will take place imme- 
diately after the employee has satisfied the minimum require- 
ments for the advanced allowance; and except in cases of abso- 
lute necessity, employees will not retire in the period between 
steps. In the earlier English systems, the broad step device 
was tried. In the civil service, its evil effects were overcome 
by the treasury through an exercise of its discretionary power 
in fixing the amount of benefit, in such a way that small annual 
steps were substituted for the broad steps. 30 In the earlier 
police retirement systems, no benefits were granted except in 
the case of disability proved through medical examination, 
and broad service periods between increases were established. 
That distinguished statistician and actuary, William Farr, 
demonstrated that either the employees deliberately made a 
selection against the system or the effect of being eligible for 
an increased superannuation benefit was injurious to health, 
because almost all the retirements on account of ill-health took 
place immediately after the employee was entitled to a higher 
allowance. 31 If the arbitrary scheme for establishing a rela- 
tionship between the amount of benefit and the length of serv- 
ice is selected, experience would seem to indicate the advisa- 
bility of selecting a simple device with small annual increments 
rather than more elaborate schemes which may permit of 
marked selection against the fund. 

The Amount of the Superannuation Benefit and the Economic 
and Social Needs of the Employee 

The relationship between the amount of the superannuation Four 
benefit and the economic and social needs of the employee is Enumerated 
the last of the three broad parts into which this complex sub- 

30 See Report from Select Committee on Civil Service Superannua- 
tion, British Parliamentary Papers, 1856, Vol. IX, p. 153. 

31 Report on the County and Borough and Metropolitan Police Sup- 
erannuation Funds, by the Registrar-General, William Farr, M.D., 
F.R.S., 1862-66. Reprinted in part in Report from the Departmental 
Committee of 1889 on Metropolitan Police Superannuation, British 
Parliamentary Papers, 1890, Vol. 59, p. 163. Referred to frequently 
in hearings on the question of police superannuation. 

155 



RETIREMENT OF PUBLIC EMPLOYEES 

ject of the amount of benefit has been divided. The nature 
of the topic of this third division is manifestly such as to 
preclude its treatment in anything except broad general terms 
without any attempt at precise definition, but fortunately this 
branch of the subject lies in a field the general terminology 
of which is popularly well understood. Using such general 
terms, we may distinguish four different types of benefits in 
respect to the economic and social needs of the employee, and 
one of these may be subdivided. These types are as follows : 

i. An amount in aid of subsistence, but not enough by it- 
self to permit an employee to live decently. 

2. An amount which will secure the minimum of sub- 

sistence. This type may be subdivided on the basis 
of whether it regards the employee as an individual 
or as the head of a family. A minimum for the 
man himself is manifestly somewhat different than 
the amount for the man as a family head. 

3. An amount which is above the means of subsistence 

and will permit the family to have the necessaries 
of its standard of life. 

4. An amount which will give the retired employee prac- 

tically what he had as an active employee and involve 
little or no sacrifice on retirement. 

The advantages and disadvantages of these different types 
solely from the point of view of the student of retirement 
systems deserve special consideration. 

A Sum in Aid of Subsistence. The amount in aid of sub- 
sistence, which is insufficient to maintain a man decently un- 
less he has other resources, has one distinct merit. It is cheap. 
It might also encourage thrift, because the employees, know- 
ing that in the event of retirement because of old age they 
would have a little from the retirement system, might be led 
to save to supplement it. A small benefit of this nature is prob- 
ably the best that can be done in the case of very late entrants 

156 



SUPERANNUATION OR SERVICE BENEFIT 

into the service, if late entrance is to be permitted; and it has 
some things to commend it for use in a system for a very- 
athletic service, if the employee is retired at an early age in 
the expectation not that he will remain idle for the rest of his 
life but that he will almost immediately enter some new em- 
ployment. For a service in which an employee is expected 
to spend the whole of his working life it is probably imprac- 
ticable. Unless accompanied by a compulsory retirement pro- 
vision, it would result in retirements only in cases where men 
could no longer fulfill minimum requirements or where their 
private resources made it possible for them to quit. The great 
majority would continue in the active service much as they 
do in the absence of a system. If a compulsory retirement 
provision were enacted, many cases of extreme hardship would 
result, the service would be unpopular, and many valued 
servants would leave to take positions offering better retire- 
ment benefits or no retirement benefits and no compulsory age 
of retirement. 32 

The Minimum of Subsistence. The minimum of subsist- For Em- 
ence for the employee alone differs only in degree from an ficjividual 
allowance in aid of subsistence. It would cost somewhat more 

32 Pensions of a very small amount are of course of real assistance 
to the beneficiary. In this connection the two following extracts are 
of interest: 

". . . There can be no doubt that the new policy (Old Age Pen- 
sions) will add to the incomes of families who feel the care of parents 
and grandparents a serious, even though not unwelcome, burden. The 
better provision for children that may result from this enlargement 
of family incomes should have a favorable effect on the rising gen- 
eration." — Social Insurance by Henry Seager, New York, Macmillan 
Company, 1910, p. 143. 

"Where pensions are to be distributed on a large scale without con- 
tributions from the participants, it is inevitable that they should be 
small. And such pensions go far to lift from the shoulders of old 
age its worst burden. The man with a sure income of two or three 
hundred dollars is on a very different basis of independence, even if 
he must live with children or relatives, from him who has no such 
support in his old age. Comfort and pleasure may be to a consider- 
able degree out of his reach, but at least the wolf cannot enter the 
door." — Seventh Report of the Carnegie Foundation for the Advance- 
ment of Teaching, 1912, p. 64. 

157 



RETIREMENT OF PUBLIC EMPLOYEES 



For Em- 
ployee as 
Head of 
Family 



and would be more satisfactory to many employees. It could 
conceivably be used to advantage in the very athletic services 
and, as a retirement measure, it might prove feasible for large 
forces of unskilled laborers or other large bodies of low-paid 
employees, though its social expediency from the point of view 
of the general public might be questioned. For an ordinary 
service, however, it is impracticable because it would not lead 
to retirement without compulsion, and with compulsion it 
would make the service unpopular. 

The minimum of subsistence for the employee as head of 
a family is probably the cheapest scheme that would have a 
reasonable measure of success. It would doubtless promote 
thrift and, in a service made up largely of persons receiving 
low day wages or very small salaries, it might prove distinctly 
popular, because it would not involve a very large amount of 
sacrifice on retirement. In a force with a large number or 
a large proportion of more highly paid employees, it would 
doubtless be open to the objection that it would not be effec- 
tive without a compulsory retirement provision, and such a 
provision would render the service unpopular. The more 
highly paid employees would regard dropping from their ordi- 
nary standard of life to a minimum of subsistence as a 
calamity little short of being reduced to absolute want. 33 



33 The argument against small retirement allowances was well stated 
in a Memorial for Conversion of Superannuation Assessments into 
a Provident Fund, British Parliamentary Papers, 1852-53, Vol. LVII, 
666, p. 3, as follows : 

"The scale of pensions awarded by the Act being so extremely 
limited and the consequent reduction of income on retirement so great, 
the small number of civil servants who may survive the prescribed 
age of retirement will be compelled from the pecuniary necessities of 
their position to cling to office to the last moment and to suffer 
themselves to be fairly worn out in the service, ere they will be 
induced to accept retirement and concede to their old age the conso- 
lation of repose. This tenacity to office must moreover have a prej- 
udicial effect on the public service, since the object of a Pension 
Act, which is to provide a fitting retirement for the latter years of 
the faithful servant, to afford an opportunity of advancement to 
the zealous, as well as to the introduction of fresh and young powers 
into the official body, will be defeated." 



158 



SUPERANNUATION OR SERVICE BENEFIT 

The Necessaries of the Standard of Life. The amount 
which would permit the family to have the necessaries of its 
standard of life in those cases in which the employee has de- 
voted his life to the service is probably the cheapest benefit 
which would be successful in a force with large numbers of 
salaried clerical and professional employees, such, for ex- 
ample, as the government departments at Washington. Such 
an allowance would not encourage retirement unduly, because 
retirement would involve, perhaps, the sacrifice of a good many 
things which would be classed as luxuries, unless the em- 
ployee had saved to provide them for himself. On the other 
hand, the amount of sacrifice would not be so great that the 
administrative officer, realizing that the retirement of an em- 
ployee was needed for the good of the service, would hesitate 
to act because of any feeling that his course was committing 
the family to comparative indigence. Such a provision would 
run the least chance of exciting popular disapproval. On the 
one hand, the faithful employees would not appear to their 
friends and acquaintances as having been made destitute, and 
on the other, unless they had private means, they could not 
excite comment by an extravagant mode of life. 34 

The Absence of Sacrifice. The amount which would give 
the employee approximately what he had as an active em- 

34 The following argument advanced by the Departmental Commit- 
tee on Superannuation of Teachers in Public Elementary Schools 
(British Parliamentary Papers, 1895, Vol. LXXVI, p. 10), is a com- 
mon one and is frequently used in favor of a minimum of subsistence 
provision and the establishment of maximum limitations on pensions 
or contributions. It ignores the fact that small pensions will not 
induce retirements before the maximum age: 

"Our chief objection to the proposal [to require additional contri- 
butions for amounts over and above a certain amount] is of a much 
more fundamental character. We think that the object of a system 
of superannuation for teachers should be limited to securing them 
against want on their retirement, and should make provision for this 
on the same basis alike for all teachers, whatever their salaries, with- 
out distinction. It seems most undesirable that the state should 
require teachers to invest savings from their salaries — beyond those 
requisite for obtaining the means of subsistence in old age — in the 

159 



RETIREMENT OF PUBLIC EMPLOYEES 

ployee appeals sometimes to the thoughtless employee advocat- 
ing a non-contributory system. It would not appeal to him 
under a contributory system, because his judgment would be 
sobered by the figures of cost. Such a provision would be 
enormously expensive. It fails, moreover, to consider the 
economic needs of the employee. Under a contributory sys- 
tem it takes more from him than he can spare when his chil- 
dren are young to provide more than he needs in his old age 
when his children are all practically economically independent, 
when his parents are generally no longer living, when his own 
needs and those of his wife are naturally simple and when 
he has all his own time to use as profitably as he may for his 
own advantage. Even if the government could afford to 
allow such a benefit on a non-contributory basis, it could bet- 
ter meet the requirements of the ordinary man by reducing 
the amount of pension and paying the resulting savings in 
the form of salary in the active years of life when a man is 
carrying his maximum load. 35 To offer men a chance to re- 
tire on an allowance almost as great as his working salary 
is, moreover, to put a premium on early retirement. It is 
unpopular with the public. It leads to the impression that 
the public employee has in his position a specie of "graft." 

payment of additional premiums for the purpose of increasing their 
deferred life annuity. This would be to compel the adoption, to an 
unnecessary extent of a particular form of thrift, tending to prevent 
teachers in the receipt of good salaries from making due provision 
for their families. It seems desirable to leave them complete liberty 
to invest their surplus savings in any way they think proper." 

35 ''There is at present a tendency of going too far in the matter 
of pension legislation for governmental and private employees, with 
the result that too large a proportion of the family's income is 
required for the present payment of future benefits, which may or 
may not be realized, as the case may be. Obviously, by making the 
contributions too high, as an aim for providing for a secure and com- 
fortable old age, there is the danger that the present day efficiency 
of the contributors may be substantially curtailed. The successful 
solution of the problem lies in a conservative compromise between 
the extremes and a sympathetic understanding of the actual needs 
of the conditions when required to be met." — Frederick L. Hoffman 
in International Actuarial Congress VII, Amsterdam, 1912, Vol. 2, p. 
516. 

160 



SUPERANNUATION OR SERVICE BENEFIT 

In the minds of those who like to speculate about "the great 
analysis" it raises a question whether, if society has a suffi- 
cient production to permit such payments, it could not be more 
wisely expended in improved training for the rising genera- 
tion than in providing more than the reasonable necessaries 
of life for the generation that is passing. The man who wants 
luxuries in his old age should save for them in his youth inde- 
pendently, and should not demand that the compulsion in- 
volved in a retirement system be utilized to force all employees 
to provide them regardless of the demands that may be made 
upon them during the dependency of their children. 

Changing General Terms into Concrete Figures. This dis- 
cussion has been based on general terms, and the question may 
be asked what is the minimum of subsistence and what are the 
reasonable necessaries of life. As general terms, they are 
fairly well understood. For years courts have enforced vari- 
ous laws requiring the application of the term "necessaries"; 
and "minimum of subsistence" carries its broad definition on 
its face. To translate them into actual figures requires a cer- 
tain amount of study and investigation of the service to which 
they are to be applied. Any retirement allowance of more 
than two-thirds of final active salary would have an almost 
overwhelming presumption against it, except possibly in case 
of the lowest paid wage-earning class. An average retirement 
allowance of over half the final active salary would demand 
close scrutiny and be open to serious question, though under 
a contributory system ; with full justice done the members who 
withdraw or who die, it would not necessarily be bad. 

The whole question of the amount of benefit is one to be 
settled by compromise between the three parties to the system, 
the government, the employee, and the public. No one plan 
is perfect or is invariably to be preferred to every other. The 
object of this long discussion has been to indicate so far as 
possible the advantages and defects of the different ones. 
These merits and defects cannot be summarized, because they 

161 



RETIREMENT OF PUBLIC EMPLOYEES 

are essentially matters of detail. Unless one is patient with 
detail, one can hardly hope to judge of the merits of a retire- 
ment scheme. 

The Cost of the Superannuation Benefit 

The Factors Determining Cost. The factors affecting the 
cost of the benefit for superannuated employees is the last 
broad division of the chapter on the superannuated benefit; 
and, unfortunately, it, too, is one involving a complex mass 
of details. It may perhaps be simplified by enumerating the 
forces that determine cost in a system that provides absolutely 
nothing — not even a return of contributions — in event of death 
in the active service, withdrawal from the active service for 
any cause whatsoever, or death soon after retiring on the pen- 
sion rolls. In other words, the following are the factors de- 
termining cost in a system that provides nothing but a super- 
annuation benefit terminating on the death of the employee: 

1. The amount of the benefit. 

2. The age at which retirement takes place. 

3. The rate of withdrawal from the service by voluntary 

resignation. 

4. The rate of withdrawal by dismissal. 

5. The rate of withdrawal by sickness or accident making 

withdrawal imperative. 

6. The rate of mortality among employees in the active 

service. 

7. The rate of mortality among persons on the retirement 

rolls. 

8. The rate of interest to be earned by the money if funded 

on a scientific actuarial reserve basis. 

A suggestive arrangement of these forces is to classify them 
according to the extent to which they are within the control 
of the persons devising the system. The amount of the benefit 
and the age at which retirement takes place are variable ac- 

162 



SUPERANNUATION OR SERVICE BENEFIT 

cording to the judgment of the makers of the system. The 
system adopted will influence the rate of withdrawal from 
the service by voluntary resignation, and the rate of with- 
drawal by dismissal. Practically speaking, the rate of mor- 
tality in the active force, the rate of accident and disease 
among active employees, the rate of mortality among retired 
employees, the rate of accident and disease compelling retire- 
ment, and the rate of interest are beyond control of the makers 
of the system, though in some services general health condi- 
tions could doubtless be improved. 

Another significant list contains those factors that yield a 
profit to the superannuation fund in the event of a misfortune 
befalling a member. It contains death in the active service, 
illness or disease in the active service compelling withdrawal, 
dismissal from the active service, and death soon after pass- 
ing to the pension rolls. Withdrawal from the active service 
by voluntary resignation is a profit to the fund under such a 
system and, of course, it may or may not be a disadvantage 
to the employee. 

Any return of contributions or any benefit in the event of 
the happening of any of these profit-bringing misfortunes 
manifestly must increase the cost of the superannuation ben- 
efit. 

Factors Causing Differences in Cost Between Different Em- The 
ployees. Under a system which provides (i) that all shall Enumerated 
receive a uniform amount on retirement; (2) that all shall 
retire at the same age, and (3) that each employee is to con- 
tribute the cost of his own benefit scientifically determined on 
an actuarial reserve basis, the following factors will cause 
differences between employees in respect to the amount which 
they would have to pay as annual premiums to purchase their 
retirement : 

1. Age at entrance into the service. 

2. Sex. 

3. Possibly occupation or service class. 

163 



RETIREMENT OF PUBLIC EMPLOYEES 

The operation of these three factors should perhaps be briefly 
considered. 
Age at If payments are made annually by each employee and are 

Entrance invested immediately at interest, the younger the employee 
is on entrance the more payments he will make, the longer 
they will remain at interest, and the more interest they will 
earn in the aggregate. It follows, therefore, that the younger 
the employee is on entrance, the smaller his contribution would 
have to be. If the entire cost were to be paid in one flat sum 
on entrance, the youngest entrant would pay the smallest sum 
because his payment would remain at interest longest. His 
chances of dying or withdrawing before reaching the age of 
retirement would also be greatest, because he would have more 
years in which to be exposed to these risks than the man enter- 
ing at more advanced ages, and the chances of the fund being 
required to pay him a benefit would be the least. Unless a 
system having a uniform age of retirement charges the young- 
est entrant less for each dollar of benefit than the older en- 
trant, the younger man is, therefore, paying part of 
the costs of the benefit for the older entrant. 36 If retire- 
ment is not based on age but on length of service, and if 
all employees are required to serve a uniform period and 

36 The following criticism of a system that does not vary the con- 
tribution in accordance with the age at entrance is typical: 

"The superannuation list of many of the public departments (as 
in the case of the Customs) is at present burthened by individuals 
who have been improvidently appointed late in life, and who, after 
a service of a few years only, having attained 60 years of age, be- 
come from that circumstance alone, and not from the value of their 
past services, claimants upon the government. It would therefore 
be an unjustice to the individuals who have given, or are giving up 
their whole time, from boyhood to old age, to make them pay for the 
impolicy of those who originally appointed men so far advanced in 
years, as to be from that circumstance, in a short time necessarily 
rendered inefficient. Whatever be the reward given in old age,_ to 
an individual who has devoted his whole life to the public service, 
it will have been honestly earned. The Government must therefore 
be accountable for the consequences of their own lack of foresight in 
appointing the evidently inefficient individual, and not call upon the 
useful clerk to remedy the error which they or their predecessors com- 
mitted." — Observations on the Superannuation Fund Proposed to be 

164 



SUPERANNUATION OR SERVICE BENEFIT 

then retire, the whole situation is changed, because the pe- 
riod during which the employees are required to make pay- 
ments is the same for all and the period during which pay- 
ments may draw interest is the same, but the length of time 
during which the employee may draw a retired allowance 
becomes very different. Under a system that required thirty- 
five years of service a retirement allowance for employees en- 
tering at forty or over would cost very little, because they 
would have to live to be seventy-five before they could receive 
a benefit, and their chances of living to seventy-five would be 
comparatively small. At the other extreme would be the 
young men entering at ages before 20 who would have to 
pay enormous premiums, because they could retire at or be- 
fore fifty-five, their chances of reaching that age would be 
very great, and after their retirement they would, on the aver- 
age, be in receipt of benefits for a long period of years. Un- 
der such a system, providing for a uniform period of service 
prior to retirement, the younger entrant would have to pay 
a larger premium than the older entrant, or else the older 
man would be paying for part of the retirement allowance of 
the younger man. If both age and service conditions are 
imposed, these two forces that have been described operate 
in opposition and the result is more of an approach to equality 
of cost as between entrants of different ages. Exactly what 
the costs would be would have to be determined by an actuary 
after a detailed study of all the facts involved. 

The cost of a superannuation benefit for women employees Sex 
is very different from the cost of an exactly similar benefit 
for men, 37 mainly on account of differences in the operation 

Established in the Several Public Departments by the Treasury. Min- 
ute of 10 August, 1 821, by Mr. John Groomes of the War Office, 
London, 1822, p. 26. 

37 For a table showing striking differences in cost of retirement 
benefits between men and women, see Report on the Pension Funds 
of the City of New York, Part II, by George B. Buck, p. 119. The 
figures contrast men school teachers and women school teachers. 
For the same benefits a man entering at age of 20 would have to 
pay 345 P er cent of his salary, whereas a woman entering at that 

165 



RETIREMENT OF PUBLIC EMPLOYEES 

of three important factors influencing cost — (i) withdrawal 
from the active service by voluntary resignation; (2) mortal- 
ity both in the active service and among retired employees, 
and (3) unless a uniform compulsory age of retirement is 
provided without any option, retirement on superannuation 
benefit. Each of these forces deserves special consideration, 
since providing a difference in rates of contribution is some- 
times cited as another instance of the unfairness of one sex 
to the other. 

Withdrawal because of voluntary resignation is generally 

much more frequent among women in the early years of serv- 

Differences ice than among men, since most of the women employees are 

Between single when thev enter the service and resign if they marrv. 

Sexes: in ° . 

Withdrawal Marriage, instead of tending to make a man resign, is almost 
universally recognized as tying him more tightly to his work. 
If, therefore, the system allows no benefit on voluntary resig- 
nation, the fund derives a larger profit from the early resigna- 
tions of women employees than it does from the early 
resignations of men. In later life conditions influencing the 
withdrawals by voluntary resignation may be reversed, since 
the opportunities in fields outside the service are generally 
more numerous for men than for women, and hence more 
men may withdraw by voluntary resignation to accept them. 
If the ultimate profit from withdrawals by voluntary resigna- 
tion is greater for women than for men, clearly the women 
should not be required to pay so high a premium for their 
benefits, and, of course, the reverse is true — that if the ulti- 
mate profit from withdrawals by voluntary resignation is 
greater for the men they should not be required to pay so 
high a premium as the women. In most systems a forfeiture 
of premiums or of all rights in event of the voluntary resigna- 
tion of a woman employee on marriage has been recognized 



age would have to pay 6.49 per cent. See also Actuary's Report to 
the London School Board, 1897, by Archibald Hewat, F.I.A., F.F.A., 
and Report of the London County Council on Superannuation of 
Teachers, November, 1910, p. 12. 

166 



SUPERANNUATION OR SERVICE BENEFIT 



as contrary to a sound public policy, and consequently any 
unfairness to them on this score has been overcome in part 
at least by providing for them, sometimes as distinct excep- 
tions to the rule, a benefit on withdrawal by voluntary resig- 
nation. 

The mortality rate among men is generally higher than 
that among women at almost every age covered by a retire- 
ment system. In two ways this fact operates to make the 
rates for women higher than those for men. If the fund 
derives a profit from the death of an employee in the active 
service, this profit will be relatively greater in the case of 
the men, and hence for this reason the rates for women would 
be higher. Again, ordinarily, the women live longer than the 
men after retirement, consequently their superannuation bene- 
fits cost more, and this necessitates a further increase in the 
rates charged for them. 

If the superannuation system introduces a permissive mini- 
mum age of retirement and a higher compulsory age, or no 
compulsory age, the rates for women may have to be still 
further raised above those for men, since in all probability 
the women will retire at the younger ages, whereas the men 
will remain on until the compulsory age or until their health 
forces them to withdraw. The result will be that the women 
will make fewer payments into the fund and will receive more 
payments out of it. 

Why women should retire on a superannuation benefit at 
an earlier age than men is an interesting question. Three ex- 
planations have been suggested — one, physiological, one, 
psychological, and, the third, economic. In some retirement 
systems earlier retirement ages are provided for women than 
for men in the belief that women employees wear out earlier 
than the men, although this earlier deterioration is not evi- 
denced by a loss of vitality that raises the death rate for 
women above that for men at the ages involved. So far 
as one can judge from the evidence advanced at retirement 
hearings, the difference seems to be manifested in nervous 

167 



In 

Mortality 



In Super- 
annuation 
Retirement 
Rates 



The Physio- 
logical 
Explanation 



RETIREMENT OF PUBLIC EMPLOYEES 



The Psycho- 
logical 
Explanation 



The 

Economic 
Explanation 



conditions, and the proposal has been made that before a 
woman employee be retired as superannuated at a compara- 
tively early age because of nervous conditions she be granted 
a period of fairly extended leave at a rate of pay reduced to 
the amount of the retirement benefit, and on the expiration 
of this leave be granted a further trial in active service. The 
proposal involves granting such leave freely once to each 
woman employee who applies on the certified advice of her 
own physician. Properly safeguarded, the provision seems 
to have merit, but so far as is known it has not been specifically 
included in any system. 

The psychological reason advanced is that women gain- 
fully employed outside the home occasionally regard them- 
selves as less fortunate than those who have a domestic life 
and consider having to do such work a hardship, and conse- 
quently as soon as necessity is removed by eligibility for a 
superannuation benefit they take advantage of the opportunity 
to retire to what they believe is a more normal, more suitable 
life for a woman. That not all women employees have this 
attitude is, of course, well known to anyone who has had 
experience in working with women, but its existence in even 
a small percentage of cases would be sufficient to influence 
the superannuation retirement rate. 

Economic differences between the sexes are undoubtedly 
an important factor in leading to the earlier retirement of 
women on superannuation benefits. The great majority of 
working women are single and their dependents are generally 
parents or brothers and sisters. Working men have depend- 
ents of these classes, too, and, in addition, they generally have 
children. As the working woman grows older her economic 
burden usually grows lighter rapidly, since her dependents are 
of her own or an earlier generation, or, if she be a widow, are 
reaching the period of self-support. A man's economic bur- 
den lasts fairly late in life because he has dependents of a 
later generation, and he can help them on in life so long as 
he is able to earn, and he can leave them anything that he 

168 



SUPERANNUATION OR SERVICE BENEFIT 

has accumulated upon his death. Individual cases can, of 
course, be found to which these generalizations are entirely 
inapplicable, but the fact that they are true in a great num- 
ber of cases probably explains in part why women feel that 
they can retire when men feel obliged to remain in har- 
ness. 

Because of these differences between the sexes in respect to 
rates of voluntary resignation, rates of mortality, and rates 
of retirement on superannuation benefits, the superannuation 
system which is to be actuarially sound must keep the two 
sexes distinct if any considerable number of women are em- 
ployed. If the system provides for a fair benefit in event of 
voluntary resignation, and possibly even if it does not, the 
rates of premium will have to be higher for the women than 
for the men for the same benefit, or if the rates are the same the 
men should get a larger benefit than the women. A variation in 
the rates is therefore an evidence of actuarial equity and not 
an evidence of sex injustice. 

If the service to be included in the system embraces two Occupation 
or more distinct classes of employees who have very different 
occupations and who presumably live under very different 
economic and social conditions, it is rarely safe to include 
all in one great group with a single rate applicable to all. The 
factors that determine cost may very easily be entirely dif- 
ferent for each class. Even death rates differ. School teach- 
ers in New York, for example, have a much lower death 
rate than the street cleaners, 38 and it would be entirely unfair 
to include the two under a single system, having uniform 
benefits and uniform premium rates. To include two separate 
services properly correlated under a single administrative 
agency would not be prohibited; it would, on the contrary, 
be in every way desirable; but to include widely different 
services within a single system would not only lead to un- 
fairness, but it would make it generally difficult to adjust the 

38 See Report on the Pension Funds of the City of New York, Part 
II, by George B. Buck, New York, 1916, p. 376. 

169 



RETIREMENT OF PUBLIC EMPLOYEES 

system to the real needs of the two services and to the two 
classes of employees. 

The superannuation benefit should be the corner stone of 
the retirement system and great thought has to be given to 
the conditions upon which it shall be granted, the amount that 
shall be granted, and the cost. Broad-sweeping generaliza- 
tions cannot be drawn from the perhaps too detailed discus- 
sion of the present chapter. One possibly can be ventured. 
The ideal superannuation system is the one specially designed 
to meet the particular needs of the particular service with full 
knowledge of the merits and defects of the various possible 
devices and expedients. 39 

39 "There is a natural tendency to devise simple rules that on the 
whole will seem to work well ; but complex conditions can generally 
be served only by equally complex provisions, and like the rates of 
contributions general rules, however they may serve the large majority 
of cases, are apt to cause considerable inconvenience in the numer- 
ous cases that deviate from the normal." — Eighth Annual Report of 
the Carnegie Foundation for the Advancement of Teaching, New 
York, 1913, p. 51. 



CHAPTER VI 
THE DISABILITY BENEFIT 

Definition. The Objects Sought in Establishing a Benefit. The 
Danger of Fraud. Safeguards. The Conditions Upon Which 
Granted. The Nature and Extent of the Disability. Length of 
Service Required. The Amount of the Disability Benefit. Three 
Divisions of Subject. Amount of the Disability Benefit and the 
Amount of Salary. The Benefits Independent of Salary. Disability 
Benefits Directly Dependent Upon Salary. Disability Benefits In- 
directly Dependent on Salary. Correlating Superannuation Benefit 
and Disability Benefit. The Amount of Benefit and the Length of 
Service. The Amount of Benefit and the Social and Economic 
Needs of the Employee. Four Classes Considered. The Cost of the 
Benefit. The General Factors Determining Cost. The Differences 
in Cost for Different Classes of Employees. The Contributory vs. 
Non-Contributory System for Disability Insurance. Distinction in 
Applicability Between Disability and Superannuation. Disability in 
the Actual Performance of Duties. The Provision of a Special 
Benefit. Benefit Non-Contributory. The Amount of the Benefit. 
Correlation With Other Benefits. No Return in Event of With- 
drawal. 

Definition 

A disability benefit in a retirement system is an allowance 
paid to an employee who, through accident or disease, is ren- 
dered unfit for further service before he has fulfilled the age 
or service conditions permitting retirement on a superannua- 
tion benefit. Its distinctive characteristics are two: It is 
granted solely on the ground of accident or disease, and it 
is paid to an employee in the early years of life. 

In theory the cases of disability covered can be divided into 
two distinct classes : ( i ) those in which the accident or dis- 
ease is the direct result of the actual performance of duty; 
and (2) those in which the accident or disease results from 
other causes. Persons familiar with workingmen's compen- 
sation laws will at once recognize that the disability benefit 

171 



RETIREMENT OF PUBLIC EMPLOYEES 

of a retirement system covers far more than the award undet 
a compensation law, in that it extends to accidents and dis- 
eases not remotely caused by the actual performance of duty, 
whereas compensation laws in this country do not yet gen- 
erally recognize occupational diseases, not to mention ordi- 
nary disabilities. Governmental retirement systems, in fact, 
have not developed as substitutes for employers' liability, as 
have workmen's compensation laws ; they have been developed 
more largely in services in which industrial accidents and 
occupational diseases are probably comparatively rare, in 
which the positions are more permanent, and in which, there- 
fore, any disability, however caused, gives rise to adminis- 
trative problems, the solution of which seemed to demand a 
disability retirement benefit. In the present chapter the prin- 
cipal discussion of the disability benefit relates to disability 
not directly attributable to the actual performance of duty. 
At the end of the chapter some attention is given to differences 
in principle, which would seem to arise in case the accident 
or disease was due to the performance of duty. 

The Objects Sought in Establishing a Benefit 

The objects sought by the parties to a retirement system in 
establishing such a benefit have been considered in detail in 
Chapter I. They may be briefly summarized as follows : The 
government desires to improve its staff (i) by eliminating 
the disabled, who, in the absence of a retirement system with 
a disability benefit, are continued on its active rolls at full 
pay, because administrative officers are unwilling to dismiss 
them to possible poverty; (2) by improving the morale of 
the remaining force by removing the excusably slow and in- 
efficient, who may become pace-makers and excuses for the 
inefficient without excuse; (3) by retaining in the service 
some of the promising men who now resign, by insuring them 
against the dangers of accident and disease and (4) by at- 
tracting to the service a higher type of men by promising them 
sound insurance against these dangers. Another object which 

172 



THE DISABILITY BENEFIT 

the government might conceivably attempt to achieve through Possible 
the establishment of such a benefit is to improve the general f or ov 
healthfulness of its employees as a class, by providing a hu- Tubercular 

f , • i , «• • , Employees 

mane procedure through which employees suffering from tu- 
berculosis or other communicable disease could be retired, 
although still perfectly able to perform the duties of their 
office satisfactorily. In the absence of any retirement pro- 
vision, the thoroughly efficient employee who contracts tuber- 
culosis after entering the public service constitutes a baffling 
problem for the administrator. To continue him in the serv- 
ice may expose his fellow employees, whereas to dismiss him 
without adequate provision for his maintenance and that of 
his family is to add arbitrarily to his misfortune. Through 
an adequate disability retirement provision, the employee who 
is suffering from such a disease would be furnished the leisure 
and, to a certain extent, the means to secure proper treatment 
and the other employees would be freed from such danger 
as exposure constitutes. Such a use of the disability benefit 
might prove a constructive public health measure, and possibly 
might result in the long run not in increasing the cost of the 
disability benefit, but in reducing it. 

From the point of view of the employee, a disability benefit 
is undoubtedly an attractive feature of a retirement system, 
because it gives him what he cannot get adequately in any 
other way — life protection against permanent disability from 
accident or disease. Against old age he can provide inde- 
pendently by saving; against death he can insure with a pri- 
vate insurance company; against temporary loss due to sick- 
ness, or accident, he can also insure; but it is very difficult 
and costly to get adequate protection against the accident or 
disease that permanently destroys his earning capacity but 
does not kill him. 1 

1 The following argument advanced by the United States Com- 
missary General is perhaps worthy of note: 

". . .In cases of protracted illness, employees worry over the 
possibility of being discharged, and the anxiety tends to retard their 

173 



RETIREMENT OF PUBLIC EMPLOYEES 



Four 
Distinct 
Classes 
Tempted 



To the public a disability benefit in a retirement system is 
a distinct asset. It improves the quality of the public service; 
it prevents the disabled employee from becoming a public 
charge or a dependent on private charity, and it increases 
the proportion of the population which is able to afford ade- 
quate medical care and attention in case of accident and dis- 
ease. 

The Danger of Fraud 

The opportunity for fraud is the great fundamental danger 
inherent in disability benefits. This danger has in the past 
tended to prevent private insurance companies, which, of 
course, have no administrative control over their policyhold- 
ers, from covering disability adequately. A disability benefit 
is peculiarly susceptible to fraud for two general reasons : it 
puts a premium on dishonesty, and no perfect device for de- 
tecting fraudulent claims has been devised. 

The premium on dishonesty is offered to at least four dis- 
tinct classes. By no means all the employees in any one of 
these classes will succumb to the temptation thus created; 
without question the great majority of public servants have 
high standards of honesty and would not abuse the privileges 
which the system affords, but public servants are not an aggre- 
gation of perfect mortals ; among them is a minority which 
will not only seek to take advantage of the system, but will 
in many cases succeed, for such seems to be the invariable 
history of disability benefits. The first of the four classes 
contains the employees who dislike to work and who find a 
temptation to magnify every accident or a disease into an 
excuse for retiring. The second class consists of those who 
desire to leave the service to enter some other occupation and 
who would find a regular payment of a disability allowance 

recovery and return, whereas, if they were free from this apprehen- 
sion and felt secure of being provided for in the event of becoming 
incapacitated their strength and courage would be sustained and re- 
covery assisted rather than impeded." — 27th Report of the United 
States, Civil Service Commission, 191 1, p. 142. 

174 



THE DISABILITY BENEFIT 

a sort of crutch on which to lean at least until the new venture 
had proved itself. The third class is almost the same as the 
second; it contains the women who are planning to leave the 
service to marry. The last class includes the administrators 
who desire for one reason or another to secure vacancies in 
positions to which they have power to appoint, legally or prac- 
tically. All four of these classes have become well-recognized 
problems in disability retirement systems. 

Against these four classes the system can to a very great 
extent be safeguarded, but it cannot be absolutely proofed. 
Many of the facts necessary for an honest and efficient admin- 
istration of such a benefit are known only to the employee, 
and he may either not reveal them or deliberately falsify re- 
garding them. He can easily make his retirement on a dis- 
ability benefit appear to his administrative superiors as a con- 
summation devoutly to be wished. Safeguards have, there- 
fore, to be developed to a maximum in the legislation estab- 
lishing the system. 

Safeguards. Safeguards may be introduced in three prin- Methods 
cipal ways: (i) by providing for medical examinations; (2) 
by making the system no more conducive to retirement than 
is absolutely essential, and (3) possibly by providing some 
direct connection between the number of disability retirements 
and the premiums charged the employees. 2 

In providing for a medical examination, the legislature Medical 
establishing the system has to consider two principal ques- ^ons- Time 
tions, the time or times at which the examinations shall be at Which 
made and the selection of the physician or physicians to make 
them. The primitive device in respect to time is to have only 
one examination, made when the application is first consid- 
ered. Under such a system, some employee retired as totally 

2 William Sutton recommended that the disability provision be made 
by the establishment of a separate fund, at first on the assessment 
basis. See report of Committee on Teachers Superannuation, British 
Parliamentary Papers, 1892, Vol. XII, p. 173. 

175 



Made 



RETIREMENT OF PUBLIC EMPLOYEES 

and permanently disabled will be found in a few years occu- 
pying a responsible position in some other field. To prevent 
this abuse, the law may require : ( i ) that examinations shall 
be made periodically; or (2) that no grant shall be made in 
the first instance for a period longer than a given number 
of years (three, for example) and that at the end of that pe- 
riod the entire case shall be reexamined and final action taken, 
or (3) that the retired employee may be reexamined at any 
time in the discretion of the administrators of the retirement 
system. If, at any subsequent examination, the disability is 
found to have passed, the employee is required to return to 
active duty or to give up his allowance. Forfeiture of allow- 
ance, without the privilege of returning to the service, may 
be made a penalty if the employee was guilty of any fraudu- 
lent conduct. 
Selection of The selection of the physician or physicians is a highly im- 
Physiaans portant mat ter. The Webbs in their "Prevention of Destitu- 
tion," discussing a closely related matter of sickness insur- 
ance, say, "To require only the production of a medical certifi- 
cate from the patient's own doctor is a direct inducement to 
the patient to go to the doctor who will grant certificates most 
easily and a standing temptation to the doctors to emulate 
each other in this laxness." 3 It is probably not unfair to the 
medical profession to say that if an employee has made up 
his mind to retire, he can find some doctor, legally qualified 
to practice, who will certify him as unfit, if he can produce 
color of evidence. The tendency is, therefore, away from per- 
mitting a man to retire solely on the medical evidence of his 
own physician. Physicians selected by the administrative offi- 
cer for whom the employee works are likely to adopt as their 
definition of fitness the same definition used by the adminis- 
trator. Too frequently the chief aim of the administrator 
is to avoid an embarrassing problem in personal relations by 



3 "The Prevention of Destitution," by Sidney and Beatrice Webb, 
Longmans, Greene & Co., London, (1911), p. 187. 

176 



THE DISABILITY BENEFIT 

getting the difficult person declared disabled. Such a pro- 
cedure is far simpler than preferring charges against him 
and having him dismissed, or, if the situation does not warrant 
that course, than working out the necessary adjustments. 
Administrators apparently can rarely be made to appreciate 
the cost of this method of avoiding distasteful duties. The 
ideal practice probably is to have the examination made by 
physicians selected by the administrators of the retirement 
fund, and to permit other physicians to testify before these 
retirement fund physicians, but as witnesses only. In this 
way, some uniformity of practice is maintained and the ad- 
ministrators of the retirement system, by watching their sta- 
tistics, can detect any administrative tendency toward a gen- 
eral unloading on the system. 

The fact that a rigid medical examination is required, with Diminishing 
prescribed or possible reexaminations in the future, is in itself ^""of 1 ™" 
a factor that tends to prevent the system from being over- Benefits 
conducive to retirement, but by itself such a provision is 
hardly sufficient. Even with a strict medical examination, re- 
peated at intervals, it is doubtful if the system could meet 
the strain that would be put upon it by offering large benefits. 
The benefits must be small, not only because they are ex- 
pensive, but because, if they are large, they will offer too great 
a temptation to "beat the system." The attractiveness and 
the danger of such benefits can be still further reduced by 
increasing the uncertainty of their payment. Provision may 
be specifically included that the benefit must cease on the mar- 
riage of a woman employee retired as disabled, or in the 
event that any employee retired as disabled is engaged in an 
occupation which is inconsistent with disability. Probation- 
ary grants and periodical renewals are devices that operate 
in the same way. In the Irish Union scheme, the device was 
tried of making the whole allowance discretionary and of re- 
quiring the employee to resign before any action was taken 
regarding a pension. In that system, at the time, no superan- 
nuation benefit was granted as a right ; and the discretionary 

177 



RETIREMENT OF PUBLIC EMPLOYEES 



Placing 
Part of 
Financial 
Burden on 
Employees 



Safeguards 
a Protection 
to Honest 

Employees 



disability scheme did not work at all well ; 4 but it is a possible 
device, which might be successful in conjunction with a fair 
superannuation system, though it would perhaps give too 
much discretion to the administrators and might not produce 
retirements in cases where retirement is absolutely necessary 
for the good of the service. A more promising suggestion 
is that the right of applying for the retirement of an employee 
on a disability benefit be vested solely in the administrative 
officer directly responsible for the work of the employee and 
that no employee be allowed formally to initiate proceedings 
to declare himself disabled. The theory of this proposal is 
that so long as the responsible officer is satisfied with an em- 
ployee, there is no reason for his retirement. 

If some financial burden is placed upon the employees that 
will increase in the event that the disability benefit is abused 
and if some democracy of administration is provided, the great 
body of employees will have an incentive and a way to pre- 
vent fraudulent retirement and to correct the innocent mis- 
takes made in predicting the extent and probable duration of 
disability. In social insurance legislation, the principle is gen- 
erally recognized that sickness benefits must be locally admin- 
istered so that the corrective force of public opinion is 
brought to bear. The public opinion of fellow employees 
could undoubtedly be made a wholesome force in protecting 
the disability benefits of a retirement system from being 
abused if this public opinion can be kept interested and in- 
formed. 

To the honest employee these restrictions and safeguards 
may appear on first thought distasteful and possibly humili- 
ating, but they are in reality in his own interest. A fraudu- 
lent disability retirement, even if only a small benefit is paid, 
is an enormous drain on the resources of the fund. The em- 
ployee who has succeeded in fooling the administrators of 



4 Report from the Select Committee on Union Officers Superannua- 
tion (Ireland) Bill, British Parliamentary Papers (1882), Vol. XIII, 
P-3- 



178 



THE DISABILITY BENEFIT 

the system has made comparatively few payments into the 
fund or has occasioned only few payments on his behalf ; but 
he will, on the average, draw many payments out, because 
he has retired at a comparatively early age and, since he is 
not genuinely disabled, his expectation of life has not been 
materially reduced. In some instances, indeed, the expecta- 
tion of life of employees retired because of disability has been 
found to be greater at many ages than the expectation of life 
of persons retired because of superannuation, proving that 
the vitality of the persons retired as disabled has not been 
impaired. 5 The cost of these payments during the possibly 
long life of the fraudulent beneficiary are borne directly or 
indirectly by the honest employees. Satisfactory benefits for 
disability occurring in early life cannot possibly be provided 
out of a man's own contributions because they are entirely 
insufficient. The benefit must be provided on an insurance 
basis, the fortunate who are not disabled bearing the burden 
for the unfortunates who are. Under a wholly contributory 
system, the cost of fraud, therefore, falls directly and ob- 
viously on the honest employee. Under a non-contributory 
system, the incidence is less direct, less obvious, but the gen- 
eral trend of economic forces is to put it in the same place. 
In no way can the financial cost be shifted to the successful 
perpetrator of the fraud. The great body of honest employees 
must recognize not only that they pay for fraudulent retire- 
ment, but that conspicuous cases of successful fraud may 
rouse popular resentment against the system and against the 
employees as a class. Two or three exceptional cases can 
easily be used by a clever speaker to produce the impression 
that the entire body of public servants is corrupt and the em- 
ployees will be unable to deny the facts relating to the strik- 

B For an instance see Report on the Pension Funds of the City of 
New York, Part II, by George B. Buck, New York, 1916, p. 58, where 
it is shown that in the Police Pension Fund the expectation of life of 
the disability pensioners was greater than that of the service pen- 
sioners at all ages for which figures are available, namely from 
55 to 95- 

179 



RETIREMENT OF PUBLIC EMPLOYEES 

ing exceptional cases. Facts regarding the great body of 
everyday, steady, faithful and honest employees are prac- 
tically never striking or picturesque. They furnish no talking 
point. The employees to protect their own interests should, 
therefore, seek to strengthen any device which will prevent 
fraud yet not restrict retirement in meritorious cases. 

The Conditions Upon Which Granted 

The conditions upon which a disability benefit shall be 
granted may conveniently be considered under two heads : 
(i) the nature and the extent of the disability warrant- 
ing retirement and (2) the duration of the service required 
before the right to an allowance in the event of disability 
accrues. 

The Nature and Extent of the Disability. The nature and 
extent of disability may conveniently be considered from three 
different points of view. From the point of view of its dura- 
tion, it may be classified as temporary or permanent; from 
that of its completeness, as total or partial; and from that of 
its character, as physical, mental or what may be termed 
moral. Partial disability may be subdivided according to 
whether the disability disqualifies the employee for all work 
done by the employing government or only for certain 
branches of it. The three main aspects will be taken up in 
turn. 
Leave Reg- Temporary disability could conceivably be provided for in 

Cover" 8 r ^ e retirement system by including benefits in the nature of 

Temporary insurance against temporary absences due to sickness and 
accident; but, in foreign countries, temporary disability from 
sickness and accident have generally been covered in the regu- 
lations governing leave of absence. 6 Provision through leave 

6 When the English system of general health insurance was intro- 
duced in 191 1, the question naturally arose as to whether the em- 
ployees of the crown should be included in the system or whether, 
where necessary, their privileges of sick leave should be so extended 

180 



THE DISABILITY BENEFIT 

regulations seems, in fact, the more desirable procedure be- 
cause it is simple and leaves the administrative responsibility 
in the hands of the employee's immediate superior, who can 
act on first-hand information, whereas, under an insurance 
system, control would have to be more highly centralized and 
everything would be much more complex. Adequate pro- 
vision for temporary disability through the leave regulations 
would, however, in many cases require their revision to per- 
mit of longer absence on active pay, to safeguard the increased 
privileges against abuse, and possibly to provide some appro- 
priation system whereby the position of the absent employee 
might be filled temporarily by a substitute. 

Suggestions regarding methods of safeguarding a privilege Protecting 
of extended sick leave are of manifest importance. Federal from Abuse 
authorities at Washington grant practically as a right thirty 
days a year of "annual" or vacation leave and if necessary- 
thirty days of sick leave. Absences on sick leave for more 
than a day or two generally have to be supported by a cer- 
tificate from the employee's physician. Though the require- 
ment of a physician's certificate may prevent some abuse, it Medical Ex- 
by no means prevents it entirely. Almost every federal office aminatlons 
has its more or less notorious though exceptional cases of 
employees who are regularly sick thirty days each year, 
though surprisingly well after all their sick leave has been 
exhausted. 7 Of one federal employee who lived on a farm 

as to bring them outside the act on the ground that they were other- 
wise sufficiently protected. The general decision was in favor of 
retaining the sick leave provisions with such extensions as were neces- 
sary except in certain of the services where wage workers were em- 
ployed at regular trade union rates. See First Report of an Inter- 
Departmental Committee on Employment under the Crown as affected 
by Part i of the National Insurance Act, 191 1. British Parliamentary 
Papers, 1912. (cd. 6234.) 

7 The abuse of the privilege of sick leave is by no means general 
in the Federal service. Cases such as that cited are exceptional. The 
Committee on Departmental Methods in its report to the President 
dated December 24, 1906, showed that the average number of days 
sick leave per employee was 7.04 and the average number of days 
annual leave was 26.03, which give a total of 33.07. 

l8l 



RETIREMENT OF PUBLIC EMPLOYEES 

outside of Washington it used to be said, "He plants on 
'annual' and harvests on 'sick.' " Yet it was said he could 
always produce the required physician's certificate when the 
harvest was in. The employment of a medical visitor paid 
by the government is the practice in some places. The Lon- 
don City police, according to the testimony given some years 
ago, had marked success in dealing with the problem of sick- 
ness by maintaining their own hospital, to which were sent all 
employees who were not fit for duty. A man was either on 
duty or in the hospital or at some place to which he had been 
sent to recuperate by the hospital authorities. It is significant 
that the sickness rate was lower for the City of London police 
than for the police of the Metropolitan District of London, 
who had no special hospital, but were attended in their own 
homes by police physicians. This difference was attributed in 
part to the fact that better care and diet could be provided 
in the hospital than the men could secure in their own homes 
and in part to the fact that even if the physician in attend- 
ance is retained by the employer and not by the employee there 
is some malingering. 8 Undoubtedly the hospital device is 
the extreme to which medical examination can be carried, and 
it might not prove feasible for many services, although it 
has its distinct merits, especially in large forces of single men 
or of men on wages or small salaries. 
Other Devices for protecting sick leave privileges from abuses 

that are not dependent on medical examination have been 
introduced under different systems. Reducing the amount of 
salary after a certain preliminary period is a common one, 
but is open to the objection that it may deprive a man of 
some of the very things he needs to restore him to produc- 
tiveness. x\nother device is to make the amount of sick leave 
with full pay discretionary, but to require that the names of 

8 See Testimony of Sir James Fraser, Commissioner of City Police 
in Report from the Select Committee on the City of London Police 
(Pension Bill), British Parliamentary Sessional Papers, 1889, Vol. 9, 
pp. 9, 11. 

182 



Devices 



THE DISABILITY BENEFIT 

all employees who have had more than a certain amount shall 
be reported publicly each year to the appropriating body with 
a full statement of the facts in each case. A device tried at 
one time with marked success by the Kensington Museum 
of England has some especially good features. 9 Under this 
system, each employee is granted a certain number of days 
sick leave each year, say ten, but, if he does not require it 
all in any one year, the unused balance is permitted to accu- 
mulate. If an employee should enter the service and escape 
any illness for ten years, and should then be ill, he would be 
entitled to one hundred working days of absence with full 
pay if that much were required. If a larger amount, say 
30 days, were granted on appointment as an initial reserve 
and, if after 3 years this were added to at the rate of ten 
days a year cumulative, cases in which leave without pay be- 
came necessary because of sickness would be greatly dimin- 
ished, especially if all employees before appointment were 
given a thorough medical examination, as is done in England. 
The principal merit of the cumulative device is that it gives 
all employees an incentive to be saving of sick leave. It tends, 
moreover, toward equality of treatment for all employees. 
Under the present system of the Federal government, the 
employee who has served nine years without any illness and 
is seriously ill in his tenth year gets in that year thirty days' 
sick leave or an average of three days a year for his ten years 
of service, whereas the extreme malingerer of ten years' serv- 
ice has had three hundred days or an average of thirty a year. 
By a careful statistical examination of the sickness records 

9 See "Science and Art Department Superannuation," British Par- 
liamentary Papers, 1888, Vol. LXXVIII, p. 15. 

The Committee on Departmental Methods, on Dec. 24, 1906, sub- 
mitted to the President a report on the subject of annual leave, sick 
leave and hours of labor in the Federal Government. It recommended 
the granting of ten days a year sick leave cumulative with a proviso 
that not more than thirty days could be taken in any one year. The 
purpose of the committee was evidently to prevent the abuses that 
had arisen under the thirty-day provision and not to establish a device 
to care for the employee in case of temporary disability. 

183 



RETIREMENT OF PUBLIC EMPLOYEES 

of a service, it would doubtless be possible to devise a cumula- 
tive system, supported by medical inspections made by physi- 
cians selected by the government, that would provide for the 
vast majority of cases of temporary disability. Provision 
for exceptional cases might be made by vesting discretionary 
powers in certain high administrative officers and safeguard- 
ing them by requiring publication of the names of employees 
to whom special sick leave had been granted with all the facts 
in the case including the certificates of attending physicians. 
Cases of temporary disability could then be handled under the 
sick leave regulations. 
Disability Unless the disability is permanent and is such that it unfits 

Classes of tne employee not only for his own particular task but also 
Government f or a u other work which the government has to do, it is very 
questionable whether a sound public policy would justify his 
retirement. The destruction of the productive power of so- 
ciety that results from accident or disease clearly must be 
reduced to a minimum. If a man's productive power is crip- 
pled but not destroyed, the object of society should be to utilize 
what power remains to best advantage, and, if the govern- 
ment has a position of a lower grade which it can give the 
employee, in which he can utilize his earning power, the solu- 
tion would seem to be to give it to him. Against such a solu- 
tion, the argument is advanced that the reduction in position 
will injure the employee's pride. In so far as fear of injuring 
an employee's pride after he has been disabled would result 
in his retention in a position which he is no longer fitted to 
fill, the objection is well taken. As a mere sentimental ob- 
jection, it raises this question : How far should the em- 
ployees as a class be compelled to insure directly or indirectly 
against an injury to that kind of pride which will permit them 
to take a retirement allowance at the expense of their fellow 
employees in preference to a position which their abilities 
will permit them to fill? Undoubtedly if the accident or dis- 
ease is the direct outcome of the employee's occupation, the 
government owes him a benefit which will offset the loss be- 

184 



THE DISABILITY BENEFIT 



tween his earning power before the misfortune and his earn- 
ing - power after it, but if it is not the direct outcome of his 
work, and if the government can give him a new position 
suited to his condition, that in itself is a large provision. 

If the employee is partially disabled and is unfitted for any 
work which the government can give him, he would have to 
be allowed a disability benefit under the system or the chances 
are that he would be retained in the active service if he were 
still able to keep up appearances of normal activity. If dis- 
missed, he would be handicapped in his efforts to secure even 
that work which he is fitted to do. The system should not, 
however, prohibit him from engaging in work within his 
powers, and, if possible, the amount of the benefit should be 
such as to induce the employee to undertake some new activity. 
This question of amount of the benefit will be considered more 
at length in the section devoted to that subject. 

To distinguish between the physical and mental disability 
and the moral disability which results from laziness, loss of 
interest, dissatisfaction, dissipation or deliberate intention is 
doubtless one of the most difficult problems that arises in the 
administration of a retirement system. The disability consid- 
ered under the head of a disability benefit is, theoretically, 
disability resulting from some disease or accident which so> 
affects the employee physically or mentally that he is no longer 
capable of the efficient performance of his duties while main- 
taining proper personal relation with his fellow employees. 
The first evidence of disability whether physical, mental or 
moral is either failure to be present at work with a reasonable 
degree of regularity, or, if present, failure to perform the 
immediate duties efficiently or to preserve proper personal 
relations. The first condition to a grant of a disability allow- 
ance would seem to be, therefore, that the administration 
authority, under whom the person involved works, shall cer- 
tify that he believes, after a detailed investigation, the results 
of which are submitted in writing, that the person is physically 
or mentally incapacitated. Such a report might or might not 

185 



Mental or 
Physical 
Disability 
Distin- 
guished 
from Moral 
Disability 



Suggested 
Procedure 



RETIREMENT OF PUBLIC EMPLOYEES 

include medical evidence and to safeguard the interests of 
the employee a copy of the papers should be submitted to him, 
or, if he is not in condition to receive them, to his physician 
or other representative. He or his representatives should be 
permitted to file any answers that are in the employee's in- 
terest and then the papers should go to the appointing officer 
or other suitable officer through the regular line of authority 
for review and approval. The second condition to the grant 
would seem to be a decision from an independent medical 
authority, selected by the officers administering the retirement 
system, after examination of the person of the employee and 
such other evidence as may appear necessary to them, (i) 
that the employee is disabled from a physical or mental con- 
dition resulting from accident or disease; (2) that in their 
opinion the disability is permanent and cannot be overcome 
by a grant of any legal sick leave and (3) that the disability 
is total, or if only partial that it unfits the employee for all 
branches of the service under the government. If the medical 
referees should report that the employee was disabled for 
his particular task, but not for all work under the government, 
it would become the duty of the officers in charge of the re- 
tirement system to place the employee in the first suitable 
vacancy resulting under the retirement system. All retire- 
ments obviously will be known to the officers of the retire- 
ment system, and under a proper scheme of organization they 
will be in close touch with the civil service commission or other 
selecting machinery. 10 

10 The recommendations of the Departmental Committee on Super- 
annuation of Teachers in Public Elementary Schools (British Parlia- 
mentary Papers, 1895, Vol. LXXVI, p. 18) were as follows: 

"The application [for disability pension] should in the first place 
be accompanied by a certificate from a medical man recognized by the 
regulations stating that the applicant having been examined for the 
purpose was, at the date of the certificate, incapable, by reason of 
physical or mental infirmity, of continuing to teach efficiently in a 
school, and that the incapacity was likely to be permanent. If neces- 
sary, a second medical certificate should be required. 

It would be advisable not to grant the pension, in the first place, for 

186 



Problems 
Involved 



THE DISABILITY BENEFIT 

If the disability benefit provision is to be utilized to permit Tuberculosis 
the retirement of persons suffering from tuberculosis, the 
administrative officer should be authorized to recommend re- 
tirement on that ground regardless of the employee's effi- 
ciency. If, however, all persons are subjected to a rigid med- 
ical examination upon appointment, and, if extended sick leave 
can be granted, it would hardly seem as if many cases of 
tuberculosis would develop to a stage demanding permanent 
retirement. 

Length of Service Required. How long an employee should The 
be required to serve before becoming entitled to a disability 
benefit in the event of incapacity resulting from accident or 
disease is an important question of public policy. Under the 
earlier conception of a retirement system, as a reward for 
long and faithful service, the position was frequently taken 
that the employee really did not become entitled to any benefit 

a longer period than a year, and then to require another medical cer- 
tificate of permanent disability. 

A report from the Inspector and from the Managers of the school 
where the applicant has been employed should be obtained when the 
application is considered. 

Power should be taken to withhold, suspend or reduce the pension, 
if the position of the applicant, or if the pensioner at any time, 
appears to warrant it. Thus a teacher incapacitated from teaching in 
a school, but able to earn an adequate livelihood in other ways, might 
be refused any pension so long as such ability continued. But we do 
not recomend that such power should be exercised if the medical evi- 
dence shows clearly that the disability has arisen from the exercise of 
the duties of a teacher. 

Periodical revision of the position of the pensioner would be neces- 
sary, say, every three years. 

It will also be necessary to provide that no such pension shall be 
granted to a clearly undeserving person. Thus, the pension should 
be refused if the disability on the ground of which it is claimed, is 
caused by circumstances for which the teacher is clearly responsible. 
Again in the event of the pensioner being convicted of crime the 
pension should be forfeited. 

Further, the pension should, we think, lapse upon marriage taking 
place after the first award of the pension. 

As an additional protection a satisfactory medical certificate should 
in future be required of every teacher before obtaining recognition 
as a certificated teacher. Such medical certificates are already re- 
quired of teachers who pass through training colleges." 

I8 7 



RETIREMENT OF PUBLIC EMPLOYEES 

until he had been in the service for a considerable period. 

The government, according to such a theory, was justified 
in measuring the degree of its responsibility for caring for 
its disabled employees by the length of time they had served 
it. If an employee was so unfortunate as to be disabled after 
he had served but a few years, he was rightly left to shift 
for himself, or to become a dependent on charity, because 
short service did not create any obligation for charitable con- 
sideration or for special reward from the government. Un- 
der the more modern conception of retirement benefits as 
forming parts of the compensation for services rendered, paid 
in this form for the common advantage of the government, 
the employees and the public, the establishment of a minimum 
sen-ice requirement is far less defensible, especially if the 
disability benefit is arranged as a system of mutual insurance. 

Clearly, if disability is caused by an accident or disease di- 
rectly due to the actual performance of duty, the government 
would now be regarded as under moral obligation, if not un- 
der legal obligation, to make provision in some suitable form 
regardless of the time the employee has been in the service. 
The distinction between accidents and diseases occasioned by 
the actual performance of duty is easy to make in thought 
but difficult to make in practice. 11 The argument may easily 
be advanced that the accident or disease due to the actual per- 
formance of duty, although not sufficient in itself to cause 
disability, was the initial force producing a chain of events 
culminating in disability. A minor accident, for example, 
may be regarded as haA'ing produced a nervous shock, which 
resulted in a complete nervous breakdown or a minor illness 
due to some condition of employment, may be stated to have 
hastened the onset of a degenerative disease. Because of this 
difficulty in determining whether disability is the direct result 
of an accident or a disease incurred in the performance of 

11 For a medical work giving- details regarding the difficulties in- 
volved see "Malingering and Feigned Sickness,"' by Sir John Collie, 
M.D. Edward Arnold, London, 1913. 

188 



THE DISABILITY BENEFIT 

duty, a distinction of this kind is difficult to administer. If 
an employee with a dependent wife and children is totally dis- 
abled say by an accident and can get an allowance in case the 
accident occurred in his line of duty, but if not will be denied 
it on the ground that he has not served the minimum number 
of years, he will get the allowance if he can show color of 
evidence, because everyone will want him to get it and no 
man will have the incentive to be highly critical. The wisdom 
of establishing a minimum period of service as a prerequisite 
to eligibility is, therefore, perhaps somewhat questionable. 

The interests of society as a whole are undoubtedly that 
provision for genuine disability shall be made in a reasonable 
amount regardless of the length of time the man may have 
been in the service. The fact that the disabled employee may 
have served only a few months does not lessen his need nor 
the need of his children. An adequate system of insurance 
provides for such cases systematically, whereas, in the ab- 
sence of a system, the employee and his family may become 
dependent on public or private charity. 

The employees themselves under a contributory system 
would almost certainly prefer to pay a little more and secure 
protection from the outset than to save a little on the premiums 
and have no protection against disability in the earliest years. 

Rigid medical examination of all applicants with the rejec- Medical 
tion of all who are not in sound health is, of course, a pre- Examination 

on Entrance 
requisite in a system that insures against disability from the 

outset, if the system is to be protected against the obvious 
dangers of such a provision. 12 A thorough medical examina- 
tion made by the physicians employed by the system 13 would 

12 For many positions in the Federal Civil Service a medical exami- 
nation is already required and this is also true of many municipal 
services, such as fire and police. 

13 In the Federal Service examinations could be conducted by the 
surgeons of the Public Health Service. That service could make the 
data thereby secured of value in promoting public health. Periodical 
examination of all employees by the Health Service might prove 
desirable. 

189 



RETIREMENT OF PUBLIC EMPLOYEES 

operate in many respects as a minimum service condition. The 
employees admitted would be what an insurance man might 
term "select risks," because all those apparently liable to be 
retired early would have been eliminated. In life insurance the 
selection through medical examination is regarded as exerting 
an influence, of course in a constantly diminishing degree, for 
five years, after which its effect is gone. 

Additional elements of protection could be secured through 
increasing the amount of benefit somewhat with length of 
service, that is, by granting only a very small amount in the 
first few years of service. This subject belongs more prop- 
erly, however, in the following section on the amount of bene- 
fit. 

The Amount of the Disability Benefit 

Three Divisions of Subject. The question of the amount 
of the disability benefit may be considered under the same three 
general headings that were used in discussing the amount of 
the superannuation benefit, namely, (i) its relationship to 
the amount of salary or wages; (2) its relationship to length 
of service, and (3) its relationship to the social and economic 
needs of the employee. The principles that govern the two 
benefits are, of course, in many respects identical ; and the pres- 
ent discussion will, therefore, not go into details regarding 
the common points considered in the chapter on the super- 
annuation benefit, but will be devoted mainly to those features 
which are peculiar to the disability system. 

The Amount of the Disability Benefit and the Amount of 

Salary 

In their relationship to salary, as was pointed out in the 
preceding chapter, benefits may be : ( 1 ) entirely independent 
of salary; (2) directly dependent on salary; or (3) indirectly 
dependent on salary. In dealing with disability benefits a com- 
bination of two or more of the preceding types may become 
of importance. 

19Q 









THE DISABILITY BENEFIT 

The Benefits Independent of Salary. Disability benefits en- 
tirely independent of salary might conceivably be of four 
kinds: (i) a discretionary amount; (2) a fixed sum; (3) the 
annuity which the accumulation from a fixed annual payment 
will purchase; or (4) the amount of disability insurance which 
a fixed annual premium will purchase. 

The discretionary amount in the event of disa^'lity must, The Dis- 
of course, be considered as protected by a maximum limitation "mount^ 
above which no grants could be made under any circumstances 
whatever. Thus protected, its merits and defects would prob- 
ably depend on the character of the force to which it was 
applied and the character of the administration. In a force 
in which political activity is rife and the administration open 
to influence, a maximum grant would probably become the 
rule, but exceptions might be made on grounds other than 
the good of the service. In an ably administered force little 
affected by influence, the system might be argued to have cer- 
tain advantages, because it would permit the gradual devel- 
opment through experience of a code of administrative rules 
that would insure practical equality of treatment of all em- 
ployees under like circumstances and at the same time allow 
certain important factors in the case to be taken into considera- 
tion. Among these factors may be enumerated the nature and 
extent of the impairment of earning capacity and the extent 
of the family obligations of the employee. Such a provision 
might tend, moreover, to introduce an element of uncertainty 
into the grant and might thereby diminish the temptation to 
make fraudulent applications. 

Among the employees, however, such a system would prob- 
ably prove highly unpopular. They would want to know the 
exact amount they would receive under given circumstances, 
and even under the wisest and fairest administration differ- 
ences of judgment would almost certainly arise as to the rela- 
tive merits of different cases. Although, under a contribu- 
tory system, or possibly even under a non-contributory system, 
this objection could be overcome in part by having the em- 

191 



RETIREMENT OF PUBLIC EMPLOYEES 

ployees represented in the administration, it is doubtful if even 
this arrangement would be so popular as fixed rules to be 
administered without discretion. 

A further objection to the discretionary amount is that it 
introduces an element of financial or actuarial instability into 
the fund. One political administration might be much more 
generous than any of its predecessors and the liabilities in- 
curred thereby might become far more than the assets that 
have been provided to meet them. If the scheme has been 
safeguarded to a maximum extent against improper retire- 
ments and, if a political administration could not make more 
retirements than its predecessors, but could only allow more 
generous benefits, this financial instability could probably be 
overcome by requiring that the actuaries should base all their 
premium rates on the maximum possible allowance and that 
any surplus arising from this procedure shall be equitably dis- 
tributed for the benefit of the fund. The introduction of 
an element of profit from low disability rates and low benefits 
might be advantageous in keeping down the number of re- 
tirements, though it would increase the cost of the system by 
requiring the distribution of profits. 
The Fixed The fixed amount independent of salary would necessarily 

be small, not greater than the salary of the lowest paid em- 
ployee, and presumably not much above the minimum of sub- 
sistence for a man and his family. It would mean absolute 
equality of treatment for each case, regardless of such factors 
as the nature and extent of the impairment of earning capacity, 
the family obligations of the employee, the extent of the em- 
ployer's responsibility for the incapacity, the length of his 
service or the amount of his salary. Possibly the instrument 
establishing the system could overcome these difficulties to 
some extent by providing a certain basic sum which could be 
added to or subtracted from in certain fixed amounts or pro- 
portions according to certain fixed rules. For example, addi- 
tions could be made for each year of sendee, for each depend- 
ent child or for a wife. Classifications of accidents and diseases 

192 



THE DISABILITY BENEFIT 

could be established on the basis of the extent to which they 
constitute an impairment of earning capacity and the amount 
to be added to or subtracted from the basic sum could be pro- 
vided in each case. It is doubtful, however, whether the time 
is yet ripe for so complicated an instrument, though a discre- 
tionary amount protected by maximum and minimum limita- 
tions could be provided in the instrument with a mandatory 
provision that the administrators shall prepare and publish 
such a schedule, but shall have power to modify it from time 
to time as experience may dictate. Such a system would, of 
course, be very complicated, though it might be worked out 
actuarially by figuring all costs on the basis of the maximum 
grant in case of the happening of contingencies which 
require a disability allowance and equitably distributing 
any surpluses. Effort should, however, be made to pro- 
vide definite benefits in so far as the dangers of life may 
be anticipated so that distribution of profits shall not become 
an important part of the system. The object of introducing 
so complicated a system would be to bring about a closer rela- 
tionship between the actual social and economic needs of each 
case than is possible through any fixed and arbitrary system. 

The annuity which the accumulation from a fixed annual The Fixed 
payment will purchase is obviously impracticable by itself as ontn uaon 
a means of providing a disability benefit after a short term 
of service because the number of payments made before dis- 
ability occurs is small, they have not been drawing interest 
long, and although the employees properly retired on a disabil- 
ity have impaired lives and probably will not live so long as 
employees of the same age in active service, yet they retire 
at early ages and will require several payments. Some of 
course do live to extreme old age. What a man has saved 
for himself will not, therefore, be of much use if he is disabled 
in early life. Adequate disability benefits can only be pro- 
vided on a collective or an insurance basis. Each employee 
could, however, be required to pay a certain fixed amount each 
year to be applied as a premium for the purchase of disability 

193 



RETIREMENT OF PUBLIC EMPLOYEES 

insurance, and the amount of the benefit could be the sum 
which the premium paid would purchase. 

The Disability Benefits Directly Dependent on Salary. Disabil- 

Scak 7 *ty Dene fi ts directly dependent on salary, whether the salary 

used is terminal or one of its variants, or the average through- 
out service, require the use of a salary scale if the fund is 
to be scientifically administered. The objections to the use 
of a salary scale, discussed at length in the chapter on superan- 
nuation benefits, 14 are equally applicable to a disability benefit. 
It introduces an unstable element into the system, it interferes 
with the introduction of administrative changes, it results in 
an element of unfairness as between classes of employees and 
as between individual employees of the same class, and it 
necessitates changes in rates of contribution. Careful ex- 
amination by an actuary may show, however, that the objec- 
tion of unfairness is technical rather than practical, because 
the differences in rates of advancement may be more than off- 
set by the fact that accident and disease are relatively more 
frequent among the men in the lower compensation classes. 

Disability Benefits Indirectly Dependent on Salary. To base 
the amount of a disability benefit on the accumulation from 
a contribution of a fixed percentage of salary is, of course, 
impracticable as a sole provision for disability for reasons 
already set forth. It would, however, be feasible to require 
each employee to pay a certain percentage of his salary as a 
premium to insure himself against disability occurring within 
the year covered by the premium. Such a procedure would 
permit of a relationship between the amount of salary and 
the amount of disability benefit and still would not require 
the introduction of the salary scale in computing the allow- 
ance. Exactly how such a provision would work in a par- 
ticular service would have to be determined by an actuary on 
the basis of the disability records of that service. 

14 See pages 126-137. 

194 



THE DISABILITY BENEFIT 

Correlating the Superannuation Benefit and the Disability Nature of 
Benefit. The discussion of types of disability benefits in their ro em 
relationships to salary has thus far treated the disability branch 
of the system as entirely distinct from the superannuation 
branch, but, of course, in an actual retirement system the em- 
ployee who is granted a disability benefit has acquired some 
interests under the superannuation system. It is, of course, 
possible to merge all benefits in one scheme without trying to 
differentiate the parts. Indeed in the English system for civil 
service employees, which is on the assessment or cash dis- 
bursement plan without contributions, the only difference be- 
tween the disability benefit and the superannuation benefit is 
that the disability benefit is granted to persons below sixty 
on medical certificate of incapacity, whereas the superannua- 
tion benefit is granted to persons sixty or over without certifi- 
cate. If, however, the scheme is to be on an actuarial basis 
and if any attempt is to be made toward equality of return, 
the two branches have to be considered separately and then 
correlated. 

Speaking very broadly, it may be said that the disability Methods 
branch of the system and the superannuation branch may be 
correlated in two distinct ways. The difference turns on what 
is done, in case an employee retires because of disability, with 
the reserve which has been accumulating to provide his super- 
annuation benefit. In one case, this reserve would revert to 
the fund as a whole to be utilized in reducing the amount of 
the premiums. In the other, it would be utilized to increase 
the amount of the disability benefit paid to the employee who 
retires. 

In a system which endeavors to preserve in its superannua- 
tion branch equality of return for all employees and bases 
the amount of the superannuation benefit on the purchasing 
power of the accumulation from each employee's contribution 
or from the accumulations made in his behalf, the plan to have 
the superannuation reserve or accumulation revert to the fund 
in the event of disability obviously occasions an inequality in 

195 



RETIREMENT OF PUBLIC EMPLOYEES 



Disability 
Devices 
Giving 
Equality of 
Return 



the amount of the reversion as between different employees. 
This inequality is traceable to two sources, differences in length 
of service, and, if the contributions are related to salary, dif- 
ferences in the salary. The longer a man has served, other 
things being equal, the greater his accumulation. If contri- 
butions vary with salary, in cases where the periods of service 
are equal, the accumulations will vary with salary and interest 
earned. Unless, therefore, the disability benefit is varied ac- 
cording to sen-ice and salary, a forfeiture of the superannua- 
tion reserve or accumulation to the fund in the event of disabil- 
ity produces inequality and results in a grave injustice to a 
man disabled after long and successful service. 

If the ideal of equality of return is the dominating one in 
establishing the superannuation benefit, and, if the amount of 
that benefit is made to depend on the accumulation from con- 
tributions, which are in turn based on the amount of salary 
earned each year, then the logical development of the disability 
benefit would seem to be to utilize the accumulation from the 
superannuation system to increase the amount of the disability 
benefit in the event of disability retirement. This procedure 
w T ould introduce an increase in disability benefits related indi- 
rectly to service and salary. 

Under such a system, each employee would get from his 
superannuation contributions or those made in his behalf, their 
exact value in benefits regardless of the time at which he re- 
tired. L'nder the disability branch of the system, equality 
in the benefits actually received cannot be provided, because 
a disability system is an insurance system in which those who 
escape disability pay the benefits of those who unfortunately 
do not. Equality in a disability system must consist in pro- 
viding equal insurance against disability for equal premiums. 
One man's dollar must be as powerful as another's in the 
amount of protection it will purchase. 

Three different disability devices suggest themselves as 
being in harmony with such a general plan for the superannua- 
tion benefit. In describing them the employee will again be 

196 






THE DISABILITY BENEFIT 

spoken of as paying the premiums, but it must be remembered 
that the devices are equally applicable if the government pays 
the premiums in the employee's behalf or if the cost is divided 
between the government and the employee. The devices are 
as follows: 

i. That each employee be required to carry in the retire- 
ment system a fixed amount of disability insurance, payable 
as an annuity — probably a minimum of subsistence or possibly 
less — and to pay as an annual premium the sum which this 
insurance costs. 

2. That each employee be required to pay a certain fixed 
amount of premium each year for disability insurance and 
in the event of disability be granted an annuity of such amount 
as this premium will purchase. Under such a system, the 
amount that he is to receive may be determined by his age 
at entrance and remain fixed throughout service or it may 
vary from year to year, by having each year's premium insure 
him against disability occurring in the year in which it is paid. 
The latter course might prove undesirable because the amount 
of benefit which could be purchased might be abnormally high 
in the first five years especially if a rigid medical selection of 
candidates for appointment is made. 

3. That each employee be required to pay instead of a 
fixed amount, as in 2, a fixed percentage of his salary as a 
premium each year toward disability insurance and in the 
event of disability receive what the premium will purchase 
in the year of his age at which disability occurs. This scheme 
also may prove undesirable in a given service, because the 
benefit might be too high in the early years following entrance. 
Decision would have to be reached on the basis of actuary's 
figures applicable to the particular service. 

The Amount of Benefit and the Length of Service 

A relationship between length of service and the amount 
of the disability benefit naturally results if the superannuation 
reserve is used for the purchase of a disability benefit. The 

197 



RETIREMENT OF PUBLIC EMPLOYEES 

increase with increasing service that flows from this source 
is very gradual during the early years of service, and becomes 
fairly rapid as the superannuation retirement age is ap- 
proached. Such an arrangement seems desirable in a disabil- 
ity retirement system because it puts a premium on working 
and offers a minimum inducement to taking advantage of 
the system through a fraudulent early retirement. Under 
other types of system, arbitrary increases with increasing 
length of service can be introduced, just as they can in the 
superannuation benefit. 
The The selection of an arbitrary scale is a matter for very 

Scale™ 17 ser i° us consideration. A common device has been to grant 
a fixed fraction of salary for each year of service, for ex- 
ample, one-sixtieth under the English Act of 1859 and under 
the act establishing the New York City School Teachers' Re- 
tirement Fund. The employees were not eligible for disabil- 
ity retirement under the English Act until they had served 
fifteen years, nor under the New York Act until they had 
served twenty years. Obviously, devices of this character 
do not meet the requirements of a system that attempts to 
insure the employee against disability from the moment he 
enters the service. Although a disability benefit of one-six- 
tieth is much better than nothing, it would not be enough 
to lead to a man's retirement, if he could still be in attend- 
ance upon his work, nor would it sustain him if he was so 
ill or so injured that he was absolutely forced to resign. Even 
ten-sixtieths would be an insufficient allowance to induce the 
retirement of an employee who could in any way retain his 
position on the active rolls. The arbitrary scale must, there- 
fore, start with a fairly large minimum, possibly not less 
than the minimum of subsistence for the employee as an indi- 
vidual. If less is offered, the system can hardly produce the 
results which those who establish it desire. Additions to this 
minimum must at the outset be very gradual, if any are made 
at all, so as to keep down the temptation toward fraudulent 
retirement. As the twilight zone of life is approached, the 

198 



THE DISABILITY BENEFIT 

benefit, it would seem, should increase more rapidly, so that 
at the permissive superannuation retirement age it would 
merge into the superannuation retirement scale without any 
marked break. In the twilight zone of five or ten years be- 
fore the permissive retirement age, the nice problem is to 
preserve a happy balance between offering the reasonably effi- 
cient employee the necessary inducements to remain in service 
and making the inducement so great that everyone will try 
to help the worn and disabled man to hang on until the goal 
of maximum benefit is reached. Broad steps, as was stated 
in the discussion of the superannuation benefit, are bad. In 
a disability benefit uniform steps from entrance to retirement 
are probably also bad, though possibly they might work well 
if a minimum was established for a certain preliminary period 
before they began to operate. Obviously, the amount of dis- 
ability benefit must never be permitted to exceed the minimum 
superannuation benefit, and the initial superannuation benefit 
in all probability should never be much greater than the max- 
imum disability benefit. 

The Amount of Benefit and the Social and Economic Needs of 

the Employee 

Four Classes Considered. The relationship between the 
amount of the benefit and the social and economic needs of 
the employee can conveniently be considered under the same 
four heads that were used in discussing the superannuation 
benefit, namely, (i) a grant in aid of subsistence; (2) a min- 
imum of subsistence, (a) for the employee as an individual, 
(b) for the employee as head of a family; (3) an amount 
which will permit the family to have the necessaries of its 
standard of life; and (4) an amount which will give the em- 
ployee practically what he had as an active employee. 

The sum in aid of subsistence but insufficient to sustain The Sum 
the employee himself has been discussed to some extent al- Subsistence 
ready in connection with the question of the relationship be- 
tween the amount of disability benefit and length of service. 

199 



RETIREMENT OF PUBLIC EMPLOYEES 

It was there pointed out that it would not result in retire- 
ments if the disabled employees were by any means able to 
hang on in the active service. It would not, moreover, be 
sufficient, by any means, to fulfill the requirements of justice 
in cases in which the disability was caused directly by the 
actual performance of duty. Such cases would have to be 
allowed a larger benefit, which, if it came from the retirement 
system, would necessitate drawing that difficult distinction be- 
tween what was and what was not the result of the actual 
performance of duty. Under such a system, some employees 
might become, charges upon public or private charity. 
The Min- The minimum of subsistence for the employee as an indi- 

Subsistence vidual would not result in the retirement of any disabled man 
with a family who could by any means remain in the active 
service and it is probably an insufficient allowance for a man 
disabled in the active performance of duty. Men with fam- 
ilies of young children would have to resort to public or pri- 
vate charity. If such a sum is to be offered as a benefit, it 
would seem as if it were suitable only for the starting point 
in a scale applied to a service where men enter at very early 
ages before they have assumed family responsibilities or for 
services employing a considerable number of single women. 
Such a scale should probably provide for a fairly rapid in- 
crease to a minimum of subsistence for the employee as a 
head of a family. 

The minimum of subsistence for a man with an average 
family would seem the desirable starting point and would 
probably be sufficient for a good many years after entrance. 
Such a small benefit might lead to the retention of some of 
the more highly paid employees who become disabled, but the 
more highly paid employees are generally the older men with 
longer periods of service and, if the benefits increased with 
length of service, the amount to which they would be entitled 
would be above the absolute minimum. From the point of 
view of the general public, it is probably very desirable that 
all employees shall be insured for a minimum of subsistence 

200 



THE DISABILITY BENEFIT 



so that the dependents shall be systematically provided for 
and the family maintained even if the natural breadwinner is 
disabled. 

An amount above the minimum of subsistence which will 
permit the family to have the necessaries of life requires high 
payments for insurance and requires a fairly close relation- 
ship between the amount of salary and the amount of benefit. 
It involves so little sacrifice on retirement that it might offer 
a great temptation to fraud. This danger would probably be 
so great as to make the use of this standard inadvisable except 
for the maximum benefit granted, and even then its use there 
is doubtful. 

The benefit that would cause little or no sacrifice is, of 
course, out of the question. Even if fraud could be elim- 
inated, it would be enormously expensive. Fraud probably 
cannot be eliminated and such a prize would be too great a 
one to offer to successful perpetrators. 

The Cost of the Benefit 

The General Factors Determining Cost. The cost of disa- 
bility benefits is, of course, almost the determining factor in 
reaching a decision on the amount that can be allowed. If 
the system established provides a fixed sum per annum for 
all employees retired as disabled prior to the minimum super- 
annuation age with no return of premium in event of death 
or withdrawal from the service for any cause other than dis- 
ability, the following factors would determine the cost: 



The 

Necessaries 
of the 
Standard 
of Life 



The 

Absence of 
Sacrifice 



The 

Factors 

Enumerated 



1. The amount of the benefit. 

2. The amount of service required before the right to a 

benefit in the event of disability accrues. 

3. The disability rate, which indicates at what ages dis- 

ability occurs and how large a proportion of the 
force at that age are affected. The disability rate 
is frequently divided in actuarial work according as 
the disability is or is not the result of the actual per- 
201 



RETIREMENT OF PUBLIC EMPLOYEES 

formance of duty. It would be interesting if it 
could be divided according as the disability is gen- 
uine or simulated. 

4. The mortality rate among the employees retired on 

disability benefits, which indicates how many pay- 
ments will have to be made. 

5. The mortality rate among employees in the active serv- 

ice. 

6. The rate of withdrawal from the service for other rea- 

sons than disability. 

7. The rate of interest. 

Founder's With the possible exception of the rate of interest, every 

Over Cost one °^ ^ e seven factors influencing cost are at least to some 
extent within the control of the founders of the system and 
its managers. Manifestly the two important factors, the 
amount of the benefit and the amount of service required 
before the right to a benefit accrues, can be fixed at will and 
are determined ultimately by the judgment of the legislators 
establishing the system. The disability rate consists of a cer- 
tain minimum, which represents such resignations because of 
disability as would take place even in the entire absence of 
any disability benefits in the retirement system. These disabil- 
ity retirements might possibly be spoken of as an irreducible 
minimum if one did not entertain the hope that a retirement 
system, by focusing attention on the number of cases of pre- 
mature disability and by providing better means for permit- 
ting care in initial stages of disease, may not in the long run 
reduce this present minimum. To this present minimum, a 
disability benefit adds the retirements of persons who in the 
absence of a system remain in active service. How many it 
adds depends on two factors within the control of the founders 
of the system, namely, the extent to which the benefits offered 
encourage or discourage retirement and the extent to which 
effective devices for detecting and preventing fraud are de- 
veloped. Generous benefits not only lead to the retirement 

202 



THE DISABILITY BENEFIT 



of many who are genuinely disabled but would not retire 
unless the benefits were generous, but they add new induce- 
ments to the morally weak. Devices to protect againrt fraud 
can scarcely be too highly developed in the interest of the 
honest employees who must ultimately bear the burden for 
the disabled. 

The mortality rate among the employees retired because of 
disability is at its maximum, others things being equal, when 
the system is so devised and so administered that none are 
retired unless they are suffering from genuine serious disabil- 
ity due to accident or disease. These persons have impaired* 
lives, and the average length of time which they will live is 
very much less than the average time that active employees 
of the same age will live. The average number of years that 
benefits will be required for them is, therefore, short. As 
the systems become less effective, the number of persons with 
minor disabilities or simulated disabilities who find their way 
on to the retirement rolls is markedly increased. The lives 
of some of these persons are only slightly impaired and, if 
one may judge from the statistics of some retirement systems, 
many of them are not impaired at all. 15 They will live on 
to a ripe old age, receiving their retirement benefit checks 
regularly every month until the end. These benefit checks 
are, of course, drawn on the fund and are directly cr indi- 
rectly paid by the other employees. The influence of the sys- 
tem adopted on the mortality rate after retirement is a matter 
of prime importance in determining cost. 

The effectiveness of the system also determines in part at 
least the rate of mortality in the active service. In the ab- 



The 

Mortality 
Rate of 
Disability 
Pensioners 



The 

Mortality 
Rate in 
the Active 
Force 



15 In the Police Pension Fund of the City of New York the dis- 
ability pensioners have a longer expectation of life than the service 
pensioners of the same age. The rates of disability retirement in 
that fund are comparatively high. See Report on the Pension Funds 
of the City of New York, Part II, by George B. Buck, New York, 
1916, p. 58, also Report on the Police Pension Fund of the City of 
New York by the Bureau of Municipal Research, 1913, pp. 168 and 
170. 

203 



RETIREMENT OF PUBLIC EMPLOYEES 

sence of a disability benefit, many persons whose lives are 
seriously impaired remain on in the active service until their 
death. When a disability benefit is introduced, persons of 
this class tend to retire on disability benefits and their deaths 
take place while they are disability annuitants. The establish- 
ment of a disability benefit thus reduces the number of deaths 
that take place in the active service. If deaths in the active 
service are allowed to be a profit to the system, the extent of 
this profit will be governed in part by the effectiveness of 
the disability system, being at its maximum under that system 
which permits the smallest number of disability retirements. 

Under a very loose administration or under a poor law, 
the rate of withdrawal by voluntary resignation may even be 
affected. Some employees who would have left the service 
in any event cannot resist the opportunity to make a small pro- 
vision for the future by going out by the door of disability 
retirement, instead of by the door of voluntary resignation. 
The Real The extent to which the founders of the system guard it 

Disability against these evils will in a large measure determine the cost 
of the insurance to the employees. Somewhere lies a natural 
disability rate, possibly susceptible to progressive reduction 
by advancing science, and the object of the legislators should 
be to make the rate for the system approach it. To fall be- 
low it means that disabled people are being retained in the 
service; to exceed it means that some are taking an unfair 
advantage of their fellow employees. Experience would seem 
to indicate that the more rigorous the devices for preventing 
fraud the less the system is likely to cost for each dollar of 
benefit paid. 

Differences in Cost for Different Classes of Employees. 
The cost of disability benefits is, of course, different for dif- 
ferent classes of employees. Under a system that provides 
that all shall receive a like benefit if disabled, regardless of 
their age or length of service, and that each shall pay the nec- 
essary premium to pay for his share of it, leveled so that the 

204 



THE DISABILITY BENEFIT 

amount that he is to pay will be the same each year, the fol- 
lowing factors would cause differences in the premiums which 
the individual members would be required to pay: 

i. The age at entrance into the service. 

2. Sex. 

3. Occupation or service class. 

Regarding the exact relationship which exists between age 
at entrance and cost of disability retirements, no definite state- 
ment can be made, because much seems to depend on the 
nature of the service and the nature of the retirement system. 
The probability of disability increases with increasing age, 16 
but the probability of dying after retirement on a disability 
benefit seems to follow no definite rule. 17 The mortality rate 
among persons retired as disabled in the early years of life 
is apparently generally very high, tending to show that per- 
sons who retire at those ages are forced to do so because of 
serious impairment affecting their vitality. As the age of 
the disability pensioners increases, the rates tend to diminish 
for a while and then to go up, but each system seems to be 
more or less a rule unto itself. Exactly what the relation- 
ship between age at entrance and cost of disability insurance 
will be cannot, therefore, be definitely laid down, but it can 
be safely said that generally there will be a difference one 
way or the other according to age at entrance. 

Differences between the sexes in respect to premium rates Sex 
for disability insurance would be normally expected. Retire- 
ments because of disability would probably in the majority of 
cases be more frequent among women than among men in the 

16 See Report on The Pension Funds of the City of New York, Part 
II, by George B. Buck, New York, 1916, pp. 380 and 381, for a table 
showing the comparative rates of separation from active service by 
disability in ten different funds or divisions of funds in New York 
City. 

17 Idem, pp. 388 and 389, for Table of Comparative Rates of Mortal- 
ity Among Disability Pensioners in the different funds. 

205 



RETIREMENT OF PUBLIC EMPLOYEES 



Occupation 



same service, and the women retired as disabled would prob- 
ably live longer than the men disabled. The forces that would 
produce these differences are physiological, psychological 
and economic, and they have been discussed more or less at 
length in the chapter on superannuation benefits. Differences 
in the nature of the occupations of the two sexes may, how- 
ever, reverse the relative positions of the two sexes. It 'would 
be expected, for example, that, in the absence of fraud, the 
number of disability retirements would be greater among fire- 
men or policemen than among women school teachers. 

Differences in occupations and service classes may, of 
course, necessitate very wide differences in the cost of disabil- 
ity insurance. Unless such differences are recognized, em- 
ployees in safe callings will be paying higher premiums than 
their own risks demand, whereas the employees in a danger- 
ous calling will be paying less. It would seem that extra 
hazardous occupations and services should be distinguished 
in establishing the system and that the government should 
make special provision for the payment of the extra premium 
required to meet the special risk. 



Absence of 
Right to 
Return of 
Full Contri- 
bution on 
Withdrawal 



The Contributory Versus the Non-Contributory System for 
Disability Insurance 

Distinction in Applicability Between Disability and Super- 
annuation. The relative merits of the contributory and the 
non-contributory systems, which have already been generally 
discussed in Chapter II, require reexamination in considering 
who shall pay the cost of the disability benefit. In Chapter 
II, the question was considered mainly as it applied to the 
principal benefit of a retirement system, that granted on su- 
perannuation, but the arguments for and against the con- 
tributory system are essentially different in the case of the 
disability benefit. 

A leading point in favor of a contributory system of pay- 

ment for the superannuation benefit is that it leads to a recog- 

n of the rights of the employee to a return of his con- 

206 



THE DISABILITY BENEFIT 

tributions, or to some other benefit, if he does not continue 
in the service to receive a superannuation benefit. Under a 
disability system, a right to a return of all contribution is 
probably non-existent and in some cases the employee may 
not be justly entitled to any return. Under a superannuation 
system, the employee does not begin to receive any benefit from 
his contributions until he has reached the superannuation age ; 
whereas, under a disability system, he begins to receive bene- 
fits at the moment he passes the minimum service require- 
ment, in the form of constantly operating potential protec- 
tion against disability. His own contributions in a disability 
system, or his employer's contributions in his behalf, are not 
accumulating in their entirety against his reaching a given 
age, but they are being used, in part at least, from day to 
day to pay the disability benefits to his less fortunate brothers 
who have been overcome by accident and disease. To de- 
mand a return of the entire contributions under these circum- 
stances is like demanding the return of a fire insurance 
premium because the house did not burn. The most that he 
is entitled to ask is the return of any reserve which may have 
accumulated in connection with his disability insurance. 

That it removes popular misapprehension of the nature of Less 
the retirement system is a second point in favor of the con- po^fi^. 
tributory system as applied to the superannuation benefit. If Disapproval 
the disability system is protected against notoriously fraudu- 
lent cases of disability retirement, and if the great body of 
employees retired because of disability are actually broken by 
sickness and disease, it is perhaps doubtful if popular an- 
tagonism to the system could be easily aroused, and, in so far 
as the disability is the direct result of the actual performance 
of duty, the public would probably approve of the payment 
of the costs by the government and would object to its assess- 
ment apparently directly against the employee. Popular oppo- 
sition to a disability system, therefore, is probably little to 
be feared except on the ground that the advantages are abused. 

In favor of the non-contributory system, several arguments 

207 



RETIREMENT OF PUBLIC EMPLOYEES 



Arguments 
in Favor of 
Non-Con- 
tributory 

System 



may be advanced. Under it an unwarranted demand for the 
return of contributions because disability has not occurred 
would be less likely to arise. In cases of accident or disease 
due to the actual performance of duty or the nature of the 
work, the burden would be on the government. The argu- 
ment could not arise that the government was making the em- 
ployees insure themselves against those risks against which 
the government should protect them. The difficult distinc- 
tion between service accidents and diseases and other acci- 
dents and diseases might be more or less eliminated. Finally, 
if the burden was placed directly on the government and not 
the employee, it might furnish an added incentive to the legis- 
lative body to attempt to remedy those conditions which tend 
to cause disability. 

Disability in the Actual Performance of Duties 

The Provision of a Special Benefit. The discussion thus 
far has related mainly to the benefit in event of disability not 
caused by the actual performance of duty, since such disability 
is by far the more common type in the public service. Even 
in such branches of the municipal government as the police 
department and the fire department, disability in the actual 
performance of duty in comparison with disability from other 
causes is rare. ls In some branches of the public service in fact 
it would doubtless be found to be so exceptional as to make 
an attempt to distinguish it from other disability hardly worth 
while. The employee disabled in the actual performance of 
duty would thus receive from the retirement fund the same 
benefits that would be paid employees retired because of ordi- 

18 The recent report on the New York City Funds shows that in 
the Police Pension Fund for the period June 30, 1908, to June 30, 
1914, the number exposed to risk was 63,330, of whom 1,295 were 
retired because of disability, and of these only 89 were disabled in 
the actual performance of duty. For the Fire Department Relief 
Fund the corresponding figures were 27,210.5 exposed to risk and 
195 disabled, of whom only 15 were disabled in the actual perform- 
ance of duty. Report of the Pension Funds of the City of Xew York, 
Part II, by George B. Buck, Xew York, 1916, pp. 43 and 69. 

208 



THE DISABILITY BENEFIT 

nary disability; and such special provision as seemed just 
could be made by special legislation applicable to the particular 
case or by application of the general workmen's compensation 
law. If, however, the nature of the work of a service is such 
that cases of disability in the actual performance of duty 
occur with some frequency it would seem desirable to have 
special provisions for their treatment included in the frame- 
work of the retirement system. 

A question perhaps naturally arises as to whether cases of Relation to 
disability in the actual performance of duty in services where compensa- 
they are comparatively frequent should be brought under tion Law 
the operation of the general workmen's compensation law 
of the State, or whether they should be provided for under 
the retirement system. Their omission from the operation 
of the general law would, of course, be justified only if the 
protection afforded by the retirement system were at least 
as good as that which the government compels private em- 
ployers to give their employees. If at least equal protection 
for the class covered by the compensation law be assumed, 
provision in the retirement system would seem at present 
preferable. The workmen's compensation laws are generally 
drawn up to apply to wage workers, and a maximum wage or 
salary level is drawn above which they do not apply. 19 Most 
of the men included under the operation of these laws, of 
course, earn less than this maximum and the legislation very 
properly is shaped with them in view. The maximum salary 
level established in the compensation law would in many pub- 
lic services cut across the salary scale, leaving a fairly large 
proportion of employees above, to whom the law would not 
apply. The wisdom of extending to them exactly the same 
provisions as apply to workmen, whose wages are more nearly 

19 For a digest of the compensation laws see Bulletin 185 of the 
United States Bureau of Labor Statistics. For the standards for 
compensation laws recommended by the American Association for 
Labor Legislation see their pamphlet, Standards for Workmen's Com- 
pensation Laws. 

209 



RETIREMENT OF PUBLIC EMPLOYEES 

at the minimum of subsistence, is perhaps open to some ques- 
tion, especially when it is recalled that the interests of the 
government are not so well protected against abuses as are 
those of a private employer or his insurance carrier who have 
funds at stake. The disabled employee, moreover, already 
has certain rights and interests in the retirement system which 
will be involved by disability and the benefit on disability in 
the actual performance of duty could probably be better cor- 
related with the other benefit if all were components of 
a single comprehensive system than if this one particular con- 
tingency were covered by a different agency. The ideal would 
seem to be to develop a comprehensive adequate retirement 
system under single management so arranged that it at least 
furnishes benefits in each class equivalent to those which the 
law requires private employers to give their employees. 20 

In considering the establishment of a benefit in event of 
disability in the actual performance of duty certain funda- 
mental differences between it and an ordinary disability bene- 
fit must be constantly kept in mind. An ordinary disability 
benefit, on analysis, appears to be an insurance taken out by 
the employees mutually, directly or indirectly, so that those 
who escape disability may join systematically in sustaining 
those who do not. The right to the benefit is created by the 
system and does not exist in its absence. The service dis- 
ability benefit, on the other hand, is a sum in the nature of 
liquidated damages paid to the employee to compensate him 
and his dependents for injuries received. An ethical, if not 
a legal, right to compensation, would exist in the absence of 
the system. The system is merely a device for fixing the 



20 In the English Civil Service the government established a special 
system of compensation in case of injury to workmen in government 
establishments which was certified by the chief registrar of friendly 
societies as providing scales of compensation not less favorable to the 
workmen and their dependents than the general act provided. See 
"Civil Service Retirement in Great Britain," by Herbert D. Brown, 
Senate Document, No. 290, 61 st Congress, 2d Session, p. 203, Re- 
printed in House Document 732, 62d Congress, 2d Session. 

210 



THE DISABILITY BENEFIT 

amount of compensation and paying it promptly. The amount 
of benefit to be provided in event of ordinary disability is 
mainly a question of policy whereas in event of disability in 
the actual performance of duty it is to a considerable degree 
a question of justice. 

Benefit Non-contributory. Since in paying a benefit in 
event of disability in the actual performance of duty, a retire- 
ment system does not originate a right, but merely furnishes 
a machinery for recognizing an existing one, there is no ap- 
parent ground for urging that the employees should contribute 
toward the cost of the benefit. Social ethics would seem to 
demand that the cost of such benefits should be borne by the 
consumers of the service from which the disability resulted. 
Although no doubt the ultimate incidence of the cost lies be- 
yond the control of the legislators, the immediate and ap- 
parent incidence can be placed on the government as an em- 
ployer. Public sentiment would in all probability oppose the 
erection of a system which placed the burden of service acci- 
dents and diseases directly on the employees themselves. As 
a general principle, therefore, it may be said that the cost 
of the service disability benefit ought to be borne by the gov- 
ernment in the first instance. 

The Amount of the Benefit. If the employees are not called in Relation 
upon to contribute toward the cost of the benefit, and if the to Salar y 
government payments are not in the nature of deferred pay, 
the question of preserving equality of return as among indi- 
vidual employees is not involved. The ideal would appear to 
be like treatment of all cases under like circumstances. Since 
the number of cases of disability in the actual performance 
of duty is small, moreover, the government could conceivably 
appropriate the entire present value of an annuity for the dis- 
abled employee at the time he was retired, or if it attempted 
to cover the cost by the annual payment of a sum in the nature 
of an accident insurance premium and the calculations were 

211 



RETIREMENT OF PUBLIC EMPLOYEES 

not precisely accurate, the deficiency would hardly be danger- 
ously large. The objections to a benefit directly dependent 
on salary 21 seem therefore scarcely applicable to a benefit in 
event of disability in the actual performance of duty nor does 
there appear reason for objection to a benefit based on the 
number and type of the employee's dependents. 22 No reason 
would exist for having the amount of the employee's benefit 
depend in any way upon the amount of the contributions made 
by him or in his behalf. 

Appropriate devices would seem to be, therefore, (i) the 
annuity of a fixed sum, (2) the annuity of a fixed proportion 
of salary, or (3) the annuity which considers to some extent 
the number and type of dependents. For a complex service 
with wide ranges of salary and very different occupations the 
fixed sum is probably inapplicable; and an annuity based in 
part on the number and type of dependents would probably 
have to be related to salary. 

If a service is homogeneous and has a fixed scale of pro- 
motions based on length of service, it is perhaps questionable 
whether a lump sum allowance in event of service disability 
is not a more equitable provision than one based on salary. 
The man disabled in the first few years of service loses not 
only his individual wage but also the opportunity for advance- 
ment, which may have been an important part of his com- 
pensation. 
The Extent The extent of the disability must also be taken into con- 
Disability sideration in determining upon a scale of awards. In cases 
of ordinary disability if the employee is only partially inca- 
pacitated and can be given other work under the government, 
it is doubtful if the system should pay any disability benefit. 23 
If the disability was the direct result of the actual perform- 
ance of duty, however, the situation is different. The em- 

21 For a detailed presentation of these arguments, see pp. 126-137. 

22 For a statement of the arguments against such benefit when em- 
ployees contribute, see pp. 239-243. 

23 For a discussion of this point, see pp. 184-185. 

212 



THE DISABILITY BENEFIT 

ployee has been damaged and the system should provide for 
compensation. Compensation, it would seem, should depend 
on the extent of the injury or impairment without regard to 
whether the government subsequently employs the man in an 
inferior position or not. Subsequent employment by the gov- 
ernment is perhaps evidence regarding the extent of the im- 
pairment, but unless it shows that the impairment is negligible 
it is hardly ground for refusing an award. A provision might 
well be introduced in the legislature, however, that the sum, 
injury benefit plus salary earned in the new position, shall not 
exceed the amount of wage or salary prior to injury. A sim- 
ple legislative provision to vary the scale in proportion to the 
degree of injury is that of the English scheme of May, 1903, 
revised, December, 1907, 24 which established four classes: (1) 
Totally destroyed, (2) materially impaired, (3) impaired, 
and (4) slightly impaired. A different proportion of salary 
was allowed under each head. It would of course have been 
perfectly possible to have awarded a different fixed amount 
under each head. In connection with such a scheme the law 
should require the administrators to prepare and publish from 
time to time schedules of injuries and diseases to show how 
the different classes are being defined in actual practice and 
to insure an approach to equality of treatment of the different 
injured employees. The time may come when such standards 
have been so definitely worked out that they can be embodied 
in the law itself, though at present such action hardly seems 
feasible. 25 The 

The amount of the benefit in case of total disability or of Economic 

J Need of the 

serious impairment should be at least the minimum of sub- Employee 

24 For the scheme see "Civil Service Retirement in Great Britain," 
by Herbert D. Brown, Senate Document, No. 260, 61st Congress, 2d 
Session. Reprinted in "Retirement From The Classified Civil Service 
of Superannuated Employees," House Document 732, Congress, 2d 
Session. 

25 For the standards proposed for present application in workmen's 
compensation laws by the American Association for Labor Legisla- 
tion, see their pamphlet, Standards for Workmen's Compensation 
Laws, New York, 191 6. 

213 



RETIREMENT OF PUBLIC EMPLOYEES 

sistence for the disabled employee himself, if not for em- 
ployee and his dependents. If the amount of the benefit is a 
fixed proportion of salary, care should be taken to provide 
that in no case shall it be less than a certain fixed amount, 
which in the community involved will give the employee the 
minimum of subsistence. Another device to accomplish this 
object is to provide that in making awards all salaries and 
wages falling below a certain fixed amount shall be regarded 
as being of that amount. It is, of course, a well established 
fact that the proportion of salary or earnings expended for 
the necessities of life diminishes fairly rapidly as income in- 
creases, and unless the lowest paid are given a higher pro- 
portionate allowance they will become dependents. 

Correlation with Other Benefits. An important question 
in developing a special benefit in event of disability in the 
actual performance of duty is, What ought to be done with 
the reserves that have accumulated in the retirement system 
to provide the disabled employee with the other benefits had 
he fulfilled the conditions? The English system provided, 
"If, after the injury, the workman leaves the employment of 
the Government, the allowance shall be in addition to the 
pension, if any, for which he is qualified by length of service, 
provided that the compensation for the injury and the pen- 
sion in respect of length of service shall not together exceed 
his pay at the date of the injury, or 300 pounds a year 
($1,440), whichever is the less." Since the service disability 
benefit is in the nature of compensation for injury done, the 
general justice of a provision that its payment shall not pre- 
vent the payment of the reserve accumulated in respect to the 
superannuation benefit seems manifest. If the reserve for 
the superannuation benefit be regarded as deferred pay, the 
justification for any reduction in its amount, because a service 
disability benefit is granted, would seem to lie in protecting 
the government against fraudulent claims for service dis- 
ability benefits. The ordinary disability benefit is always oper- 

214 



THE DISABILITY BENEFIT 

ated on the collective or insurance basis and the actuaries can 
so adjust the premiums that the employees will not be paying 
for any benefit in case of disability in the actual performance 
of duty nor will they be entitled to any allowance in that event. 
In other words, estimated accruals from this source will be 
anticipated in fixing the premium rates. If a high degree of 
collectivism is introduced into the system the superannuation 
reserves could of course be treated in the same way. In such 
a case it would doubtless be wise to give up the idea of having 
all the cost of the service disability benefits borne by the gov- 
ernment as a distinct charge. 

No Return in Event of Withdrawal. If all the cost of the 
benefits in event of disability in the actual performance of 
duty are borne by the government and if they are regarded 
as in the nature of liquidated damages for injury done, any 
right that the employee may have in them is merely contingent 
and does not become vested until the employee is injured. 
Should he leave the service, without having been injured in it, 
he is clearly not entitled to any special allowance from any 
fund which may have been accumulated to provide such spe- 
cial disability benefits. 



CHAPTER VII 

BENEFITS ON WITHDRAWAL FROM THE ACTIV1 
SERVICE WHETHER BY RESIGNATION OR DIS- 
MISSAL 



Maximum 
Benefit 
Return of 
All Contri- 
butions or 
Equivalent 



The Extent of the Benefit Advocated. The Distinction Betweer 
Resignations and Dismissal. Four Arguments Against Distinction. 
The Desirability of the Benefit. To the Government. To the Em- 
ployee. To the Public. Objections to the Benefit. Amount of the 
Benefit. 

The Extent of the Benefit Advocated 

No one, so far as is known, advocates that the employee 
who resigns or is dismissed shall receive any extra or special 
benefit from the retirement system; the most that is urged 
is that he shall be given the full value of such a part of the 
benefits promised under the system as he has earned by the 
services he has rendered prior to resignation or dismissal. In 
a wholly contributory superannuation system in which the 
amount of the benefit is dependent on the accumulation, the 
maximum proposal is that he shall receive on resignation or 
dismissal all his contributions with compound interest. Un- 
der more complicated systems, the maximum proposal is that 
he shall receive the full actuarial reserve that has been accu- 
mulated on his account, or, if the fund is operated on the 
assessment or cash disbursement basis, that he shall receive 
the equivalent of the actuarial reserve. In other words, the 
extreme advocates of a benefit in event of resignation or dis- 
missal take the position that in the event of the happening 
of either of these two contingencies, the fund should derive 
no profit at the expense of the employee. 

216 






BENEFITS ON WITHDRAWAL 

The Distinction Between Resignations and Dismissals 

Four Arguments Against Distinction. In retirement sys- 
tems, an attempt has sometimes been made to distinguish be- 
tween resignations and dismissals by causing the man who is 
dismissed to forfeit all rights under the retirement system, 
whereas certain rights of the man who resigns are recognized. 
Such a distinction was not unnatural in a system adopted 
under the theory that the benefits were rewards for meritori- 
ous service or were in the nature of benevolent grants. Un- 
der such a theory, the case of the employee who is dismissed 
is neither meritorious nor deserving. To grant an allowance 
to the deserving employee who resigned seemed as far as the 
founders of some systems could go; and witnesses are still 
heard who regard such a benefit as inconsistent with proper 
principles. Under the more modern conception of a retire- 
ment system, as one of deferred pay for services rendered, it 
becomes very questionable whether such a distinction is in 
any way desirable if it is not highly undesirable. The chief 
arguments against such a distinction are : ( i ) that it is diffi- 
cult to make; (2) that it is likely to lead to unfair discrimina- 
tion; (3) that it is of doubtful administration expediency and 
(4) that it is of doubtful social expediency. These arguments 
require elaboration. 

Nothing is more clear cut in theory than the difference be- Difficulty of 
tween "quitting" and "being fired." In some services, es- Distinction 
pecially if the employees are of the subclerical and manual 
labor class, this distinction may perhaps be easily drawn in 
practice, but, in the higher branches of the public service, 
clear-cut dismissals are rare, for the unsatisfactory employee, 
whether merely incompetent for his work or guilty of some 
fairly serious offense, is generally permitted to resign "volun- 
tarily," though he may do so with the distinct understanding 
that if he does not he will be dismissed. It seems entirely 
unfair to grant a benefit on voluntary resignation to the man 
who resigns knowing that he has no defense against dismissal 

217 



RETIREMENT OF PUBLIC EMPLOYEES 



Discrimina- 
tion Between 
Employees 



Doubtful 
Administra- 
tive Expedi- 
ency 



proceedings, while denying one to a man, who, guilty of the 
same offense, is not given the option to resign or who presses 
for regular dismissal proceedings in the mistaken belief that 
he has a good defense. The difficulty of distinguishing be- 
tween the two may lead to rather violent fluctuations in the 
dismissal rates, and the profit from dismissals may become 
an element of financial uncertainty in the administration of a 
system on the actuarial reserve basis. 

These difficulties in distinguishing resignations from dis- 
missals lead to discriminations. The treatment of employees 
throughout the public service ought, of course, to be uniform, 
like penalties for like offenses ; but one must allow for differ- 
ences in the temperament of administrators. The highly con- 
siderate administrator who feels deep sympathy for the em- 
ployee in difficulty will frequently assume that he has done 
his full duty in securing a voluntary resignation whereas the 
highly choleric administrator, filled perhaps with righteous 
indignation at the employee's conduct, will proceed without 
delay for the employee's dismissal. Political and other in- 
fluence may, too, be brought to bear, if not to keep an em- 
ployee in the service, at least to save his record by getting him 
a chance to resign. 

Further disparity in penalties imposed results from the fact 
that the value of the benefits lost is very different in different 
cases. The young employee recently appointed loses almost 
nothing whereas the older employee's fine may be in the thou- 
sands. 

To place the power to impose fines of so far-reaching an 
effect in the hands of politically appointed administrative offi- 
cers, or even of administrators selected under the merit sys- 
tem, seems of extremely doubtful administrative expediency. 
In many sendees the officers have power, generally under 
more or less satisfactory restraints, to reprimand, to withhold 
promotion, to reduce salaries, to furlough, and to dismiss. 
The penalty of loss of position, subject to a proper review, 
seems a sufficient maximum one to place in the hands of pub- 

218 



BENEFITS ON WITHDRAWAL 

lie administrators. If the employee has committed a criminal 
offense, it is manifestly not for the administrators to assume 
jurisdiction and to impose special and peculiar fines because 
of the employee's official position. The proper jurisdiction 
for the trial of a criminal case against an employee is the 
duly constituted criminal court where he may have all the 
rights guaranteed citizens under the law and where the pen- 
alty imposed is the legal penalty. An employee guilty of a 
serious criminal offense would properly be dismissed from 
the service, but it seems of doubtful propriety that because of 
that offense he shall forfeit to the public retirement system 
a sum that may be vastly in excess of any fine that could be 
legally imposed upon him by a court if he is found guilty. 
Administrators of public offices have not the machinery for 
doing full justice. In the federal service men are occasion- 
ally reinstated because a subsequent impartial review has 
shown that their dismissal was unwarranted. Necessity de- 
mands that the administrative machinery shall be trusted to 
a certain extent, but until it has been far more fully safe- 
guarded than at present appears feasible, it hardly seems wise 
to give it the power to deprive a man of all the provisions 
that he has made for old age. 

From the point of view of society, a forfeiture on dismissal Doubtful 
is undesirable. It treats the man merely as an independent Expediency 
individual, whereas the interest of society demands that a re- 
tirement system shall treat him as the economic head of a 
family. When a man is dismissed for cause is the very time 
that the family must resort to its savings. If the government 
adopts a system that compels the employee to put his savings 
in it and then makes him forfeit those savings on dismissal, 
it arranges automatically that in the event of dismissal the 
family shall go on the rocks. Whether it will be a total loss 
or not will depend more on the individual efforts of its mem- 
bers than in the absence of a retirement system, when the gov- 
ernment cannot touch the employees' savings except through 
court action. The interests of the public is that a retirement 

219 



RETIREMENT OF PUBLIC EMPLOYEES 



Protecting 
the Interests 
of the 
Family 



system shall increase family security instead of diminish- 
ing it. 

The furthest it would seem justifiable to go would be to 
provide that the administrative officer in immediate charge 
of the employee may recommend, or the wife or children 
of the employee, or someone acting in their behalf, may pe- 
tition that benefits arising under the system to an employee 
about to withdraw, or just having withdrawn, may be paid 
for the use of the family, either as a lump sum or as an 
annuity. Possibly to protect the interests of the employee, 
he should have a right to appeal from any decision that is 
adverse under such a petition to him to the court having juris- 
diction over domestic relations. The utility of such a pro- 
vision in dealing with cases of fairly old men who have to be 
dismissed because of drunkenness is obvious, and drunkenness 
is probably the commonest cause of dismissal in the case of 
men who have been in the service for some time. 1 

If, for any good reason, forfeiture of all rights on dis- 
missal is regarded as essential, provision for a prompt and 
impartial review of the case seems imperative, especially if 
the employee has been in the service for any considerable 
period of time. 2 

1 "It appears to us that a real hardship may arise from the absolute 
forfeiture of the member's contributions and benefits, and the ten- 
dency to relaxation of the rule is one which might well be extended 
to other funds that still retain the original practice [of forfeiture of 
all benefits and contributions]. We think no difficulty should arise 
from allowing the committee of management in their absolute discre- 
tion to give a refund to the member or his dependents of any amount 
up to that of the whole of the contributions paid by him into the 
fund." — Report of the Railway Superannuation Funds Committee, 
British Parliamentary Papers, 1910, Vol. 15, p. 26. 

2 "No legal right to a pension being acknowledged at present, no 
appeal naturally exists from dismissal at any period of a man's serv- 
ice, and there is nothing to prevent the exercise of this power ; as the 
men contribute to the funds, this even now is considered a 
grievance; and should a claim be allowed to retire at a fixed period 
with a pension as a fixed scale, the grievance would be naturally 
intensified from the idea, which however ill-founded, would be apt to 
arise, that a man on approaching the time when as of right he 
would be able to claim his pension, would be liable to be dismissed 

220 






BENEFITS ON WITHDRAWAL 

In the following discussion it will be assumed that no dis- Dismissals 
tinction is to be made between dismissals and resignations, and ^ionf"^ 113 " 
that whatever course is followed in one case will be followed Distin- 
in the other. guished 

The Desirability of the Benefit 

To the Government. The assumption is frequently made Putting 
that any benefit in the event of withdrawal is entirely contrary ^With- 
to the interests of the government and tends to defeat one drawal Not 
of its principal objects in establishing a system, namely, the objection 6 
retention of good men in the service. "It puts a premium on 
withdrawal" is a frequent argument, and obviously it creates 
no new penalty against resigning. 3 The persons advancing 
this argument have undoubtedly been impressed by the strik- 
ing frequency with which men of demonstrated efficiency re- 
sign after becoming thoroughly familiar with the government 
work to accept positions in private life, sometimes even taking 
positions in which their experience gained in the government 
service is to be devoted to advance the interests of one par- 
ticular group of individuals who desire to secure special privi- 
leges from that branch of the government from which the em- 
ployee has resigned. To prevent these resignations they 
would establish a financial penalty on resignation. 

A phenomenon which is no less striking, but is generally Elimination 
familiar only to those who have been concerned with govern- of Inefficient 
ment administration, is the tenacity with which an inefficient 

for some trifling fault. Such a feeling, if it prevailed, would in the 
opinion of your committee be prejudicial to the service, and they 
would therefore recommend that after fifteen years' service an appeal 
might always be given against dismissal, either by the chief con- 
stables in countries, or the watch committees in boroughs and that that 
appeal should be to a court of quarter sessions in counties and to 
the town council or governing authority in boroughs." — Report from 
the Select Committee on Police Superannuation Funds : British 
Parliamentary Papers, 1877, Vol. XV, p. viii. 

3 "Any retirement scheme which provides for refunds is very objec- 
tionable because it puts a cash premium upon resignation and offers 
a great temptation to leave the service to those still young and capable 
enough to get outside employment." — National Civil Service Reform 
League, New York, 1906, "Superannuation in the Civil Service." 

221 



RETIREMENT OF PUBLIC EMPLOYEES 

person holds to a public position. If the penalty of forfeiture 
of contributions to a retirement system or their equivalent 
is to be imposed on resignation or dismissal, this hold will be 
strengthened. A kind-hearted administrator will find it in- 
creasingly difficult to recommend dismissal or to suggest a 
resignation if the action means not only loss of salary but also 
loss of the existing provision against old age. 4 The fact that 
the employee would have something under the retirement sys- 
tem in event of resignation or dismissal might even operate 
to stimulate the retirement of the inefficient employees. 5 
Imposing a penalty in event of resignation or dismissal 

4 The following testimony of an administrative officer working 
under the English system when it provided for a forfeiture in event 
of dismissal is significant: 

". . . Anyone in a position like myself would have considerable 
hesitation in making a formal report to the political head of the 
department that a certain man, after twenty years' service, is so 
notoriously inefficient that he ought to be discharged. Why? Be- 
cause he may have done very good service the first 10, 15 or 20 years 
of his time, but at the present moment you find he is not efficient. 
Then there is no alternative between his getting a medical certificate 
and his full pension or his going away and leaving the whole of his 
pension. You want something between the two which would enable 
me to feel that I was not acting unjustly to the man in reporting him 
as inefficient. In the memorandum I have just read there are two or 
three at a high rate of pay whose services I should be glad to dis- 
pense with and to replace with younger men, but I would not con- 
sider it fair now to them to report them as inefficient and to dis- 
charge them without any pension. Seeing that if they remain two 
or three years longer, they will get their full pension in the ordi- 
nary course." — First Report, Royal Commission on Civil Establish- 
ment, British Parliamentary Papers, 1887, Vol. XIX, p. 235, q. 6071. 

5 The following quotation from the pamphlet on "Civil Pensions for 
Federal Employees" (New York, 1909, p. 2) indicates that the Na- 
tional Civil Service Reform Association appreciates the danger of a 
forfeiture in event of dismissal in tending to keep men on in the 
service who should be dismissed. It would seem as if the same logic 
would result in favoring a benefit in event of resignation since distinc- 
tion between resignations and dismissals is so difficult to draw in 
practice : 

"His prospective pension is regarded as merely a part of salary 
already earned, but not yet fully paid. The loss of his position in- 
volves forfeiture of all right to the deferred payment. This is a 
heavy punishment and to inflict it, save for some very serious offense 
or other exceptional reason is likely to seem a mean thing to do. 
Such a system has a strong tendency to create a quasi property right 

222 



BENEFITS ON WITHDRAWAL 

might diminish the attractiveness of the public service instead The Real 
of enhancing it. The real problem of the government as an t h™Gov-° 
employer is not in keeping a particular man tied to a par- ernment 
ticular job by providing that if he leaves it he will have to 
sacrifice certain of his provisions for old age but in raising 
the general level of public service as a profession. 6 One of 
the ways of accomplishing this is to increase the opportuni- 
ties for advancement by encouraging the free circulation of 
employees among different governments, national, state and 
local, so that the man who is a success in a small position can 
look for normal advancement to the whole field of govern- 
ment service and not merely to that restricted area within 
the jurisdiction of the particular governmental unit for which 
he is working. 



To the Employee. To the employee, the proposal to place The impor- 



a penalty on resignation seems like an attempt to curtail his 
freedom of contract. The right to resign without loss is a 
sort of fire escape; few employees anticipate having to use it, 
but all want to know that it exists and is in working order 
in case of emergency. To put a barrier across the right to 



tance of 
Right to 
Resign 



in the employee to his position, a doctrine pernicious in itself and 
tending to lower the standard of his efficiency." 

6 Presser and Hamilton say in their Teacher and Old Age (Hough- 
ton Mifflin Company, Boston, 1913, p. 44) : 

"The withdrawal equity of the teacher in his own payments to- 
wards his annuity should be recognized. When he retires from the 
profession for any reason, dues withheld from his wages should be 
regarded as deferred payments invested by the state for his benefit. 
He is as justly entitled to the present worth of such savings as if it 
had been deposited by him and invested by a savings bank; other- 
wise the state cannot defend a program of compulsory insurance as 
a means of promoting thrift, encouraging saving and safeguarding 
old age. Young teachers who may not and usually do not remain 
in the profession ought not to be mulcted or penalized, even to the 
extent of the smallest part of their savings, for the benefit of those 
who do. The recognition of this equity will operate to preserve that 
mobility of the teaching profession that has proved so desirable on 
the whole to the American schools, since teachers shifting from one 
position or state to another would not be deterred by the prospect of 
the complete loss of their payments." 



223 



RETIREMENT OF PUBLIC EMPLOYEES 



Right to 

Self 



resign may diminish a man's opportunity to develop himself 
and to advance in life. 

A critical time may come in an employee's career when he 

development ^ ee * s t ^ iat ^ e ^ as out g rown the position that he holds and that 
his opportunities where he is are not broad enough really to 
test his capacities. A criticism that has been frequently di- 
rected against the public civil service as a professional career 
for young men is that, through its very certainty and its per- 
manency of tenure, it offers too great a temptation to a man 
to be satisfied with less than he believes is his best, to drop 
into a routine performance of small duties which are too well 
within his capacity until his powers of growth and develop- 
ment have become atrophied. It is a grave question whether 
the conditions of the public service may not be responsible for 
producing mediocrity in public employees where it develops. 7 
The employees and the government should be loath to increase 
still further the natural forces that already tend to make em- 
ployees continue on in positions for which they have long since 
lost their enthusiasm and in some cases even their interest. 

Employees who are thoroughly interested in their work and 
enthusiastic in developing it may find that they cannot afford 
to continue it. Not infrequently the government pays far less 
for high grade services than they will command in the general 
market. As an employee's family responsibilities increase, 
and as he has to look forward to providing for the future of 



Necessity to 

Increase 

Earnings 



7 The following testimony given by the Controller of the Station- 
ery Office before the Royal Commission on Civil Establishments (2d 
Report, British Parliamentary Papers, 1888, Vol. XXVII, p. 192, q. 
15,583), seems worthy of consideration: 

"A great many young men come into the service, and when they 
have been four or five years or perhaps ten years in it, they say, 
'I do not see any chance of the prospects I expected,' or they see 
some good chances elsewhere, and if they could get some few hun- 
dred pounds, I believe they would leave the service. In that way you 
would have the service more contented. ... It would add very much 
to the efficiency of the service by getting rid of young men who are 
discontented and who see no prospects in the service, and . . ., it 
seems to me, be an enormous benefit to the service and an economy 
to the public. . . ." 



224 



BENEFITS ON WITHDRAWAL 

his children, he may discover that in remaining in the public 
service he is not only making a personal sacrifice, which he 
as an individual might even enjoy making, but he is letting 
slip the opportunity of fulfilling his fundamental duty to his 
family and to society. The injustice of imposing a financial 
penalty on a man who resigns under such circumstances would 
seem to be manifest. In many cases the reason why an em- 
ployee resigns is that someone is willing to pay him more for 
his services, directly or indirectly, than the government is 
willing to pay. The right of the government to utilize a re- 
tirement system as a device to prevent the employee from get- 
ting the market value for his services would undoubtedly be 
denied by new entrants. 

The right to resign partakes more of the nature of a fire Escape from 
escape when the employee finds himself in an intolerable posi- skuations 6 
tion. He may discover, for example, that he has lost faith 
in the wisdom or integrity of the work on which he is en- 
gaged. A politician may be appointed the head of a scientific 
bureau and may attempt to direct the nature and the character 
of the scientific findings. If a retirement system could offer 
some particular reward of merit to the scientist who resigns 
under such circumstances, it would be rendering a distinct 
public service. Occasionally personal antagonisms develop be- 
tween a superior official and one of his subordinates, especially 
if the superior official has been selected on other grounds than 
his knowledge of the work. The only course for the sub- 
ordinate employee is to seek transfer to some other position 
or to resign. Exactly why a retirement system should seek 
to penalize him for relieving a situation which might easily 
become serious is difficult to see. It must not be assumed that 
these questions involve just the superior and the one sub- 
ordinate. They sometimes extend to the work itself, and each 
of the participants may have his following. To grant the 
retiring employee an allowance in such a case might be argued 
to be subversive to discipline. That kind of discipline that 
produces, every time the superior officer ventures an opinion, a 

225 



RETIREMENT OF PUBLIC EMPLOYEES 



The 

Woman 
Employee 



harmonious chorus of "Well put! I agree exactly," is not 
unknown in some public offices; it would undoubtedly be in- 
creased if the independent thinker, who now regards his honest 
opinion as the only one worth expressing, knew that he would 
have to sacrifice all his provision against old age, if resigna- 
tion should become necessary because of his lack of tact in 
presenting his views. 8 Sometimes cases arise in which an em- 
ployee believes, occasionally on sound grounds, that he is be- 
ing treated with grave injustice; yet he may know that any 
attempt to remedy the situation through an appeal to higher 
authorities is absolutely out of the question. The only salva- 
tion for such an employee is in getting other work, inside the 
service or out. The human nervous system is not constructed 
to withstand the nursing of such grievances, whether real or 
imagined, day in and day out, year after year. Those who 
oppose any benefit on resignation can never have appreciated 
the human wear and tear of a big public office. The right to 
resign has been spoken of as a fire escape, it might perhaps 
be more properly spoken of as a safety valve. The thought 
that he could resign in the morning if he wanted to has un- 
doubtedly permitted many a man a good night's sleep and 
has brought him back to the office in the morning ready to 
try it again. 

In case of women employees the establishment of a benefit 
in event of withdrawal is clearly necessary to meet their eco- 
nomic and social needs. 



Prevention 
of Destitu- 
tion a Main 
Purpose 



To the Public. One of the main objects sought by the pub- 
lic through a retirement system is to prevent government em- 
ployees from being dependent in their old age on public or 
private charity. This object may be defeated through a pro- 
vision requiring forfeiture of rights in event of resignation 
or dismissal. To justify a forfeiture from the point of view 

8 For an attack on the discipline argument, see "The Mischief of 
Pensions," by Michael Peters, The Gentleman's Magazine, Vol. 303, 
p. 119, London, 1907. 

226 



BENEFITS ON WITHDRAWAL 

of society as a whole, it would be necessary to demonstrate 
that the public was more interested in one employer than in 
another, and that its interest in preserving stability in the force 
of that one particular employer offset the danger that an em- 
ployee, deprived of his provision for old age under the sys- 
tem, might through an unwise move, be left helpless. Such a 
particular interest does not exist even where the people them- 
selves are the employers. The truth of this statement is self- 
evident if the employee resigns from the service of the peo- 
ple in one government agency to reenter their service in an- 
other. The service of the city could scarcely be put above 
the service of the state, nor the service of the state above that 
of the nation. It would hardly seem as if one city should 
impose a penalty on a man who left it to serve another, or 
that one state should put barriers in the way of an employee 
leaving it for another. The common interests of all demand 
freedom of movement and the development of broad oppor- 
tunities in public service. Freedom of movement will permit 
the highest development of experts, because it will give oppor- 
tunities for knowledge of varied conditions. It is, moreover, 
a mistake to conceive of the employees of the government as 
the only persons who are rendering public service. The physi- 
cian who resigns as the head of a government laboratory to 
become a teacher in an endowed medical school noted for its 
achievements in advancing medical science has only in the 
narrowest sense "left the public service." The number of 
institutions and organizations that are quasi public or are 
performing quasi public functions is rapidly increasing. No 
sound public policy, it would seem, could be served by a re- 
tirement system that would prevent the free interchange of 
men between the government services and reputable institu- 
tions performing quasi public functions. Both the govern- 
ment and the private institution would profit through the in- 
terchange because such work would offer broader possibili- 
ties ; and men respond to possibilities. To attempt to draw a 
line between what is and what is not a public service in its 

227 



RETIREMENT OF PUBLIC EMPLOYEES 

broad sense is indeed difficult. It is a question whether an 
employee who resigns his position as an elevator conductor 
in a government building operating a single car to take charge 
of three elevators in a large department store may not be ren- 
dering a greater public service in the latter capacity. His 
powers are being used in a larger way, he is producing more, 
and it is very doubtful if it makes very much difference to so- 
ciety as a whole whether the money that pays him at the end 
of each week comes from the taxpayers or from some other 
source. Society as a whole is probably less interested in ex- 
actly who passes out the counters that give the worker the 
right to consume from the general store of production than it 
is in seeing that arbitrary restraints are not imposed to keep 
a man from applying his productive power to maximum ad- 
vantage. Though undoubtedly striking exceptions can be 
cited, maximum advantage to the individual employee is gen- 
erally maximum advantage to society as a whole. 9 

9 For a strong presentation of the argument against forfeitures on 
resignation and dismissal, on the ground of public policy, with spe- 
cial reference to industrial pension systems, see ''Our New Peonage : 
Discretionary Pensions," by Louis D. Brandeis, in his "Business a 
Profession," Boston, 1914, p. 76. See also "The Pension Plan for 
the Brewing Industry," by I. M. Rubinow, The Survey, New York, 
1912, Vol. 29, p. 360-363. See also "Social Insurance," by Henry 
Seager. Professor Seager says, p. 144: 

"If corporation managers can be persuaded to substitute for their 
establishment pension plans systems that do not interfere with the 
mobility of labor, such full provision may be made through these 
systems and through special pension arrangement for public servants 
of all sorts, college professors, etc., that governmental action, except 
to provide for public employees will be unnecessary. If, however, 
corporate pension plans continue to require those who benefit from 
them to serve long years the corporate employer promising the pen- 
sion, this method of providing for old age will prove inadequate." 

Mr. Brandeis says: "Adequate old age protection cannot be se- 
cured to the wage-earner through the promise of a pension from a 
particular concern. He should have old age insurance which will 
protect the wage-earner in whosesoever employ he may happen to 
be when he reaches the period of superannuation. For the pro- 
tection of the wage-earner it is likewise necessary that the pension 
system should confer an absolute right. No pension system can be 
satisfactory which makes the granting — or the continuance of a pen- 
sion after it has been granted — a matter of discretion," p. 70. 

228 



BENEFITS ON WITHDRAWAL 

Cases can of course be cited where employees have left the Undesirable 
government service to apply their peculiar knowledge, gained esi g natlons 
while in the employ of the government, to advancing the in- 
terests of a particular group, in a way that is contrary to the 
public interest. The establishment of a penalty on resigna- 
tion hardly seems, however, a feasible method of remedying 
this evil. It is doubtful if it would prevent many changes 
which are against public interests, because in such cases large 
advances in compensation would probably be offered to offset 
loss of retirement privileges. What would be stopped would 
be the legitimate changes in the public interest because large 
advances in compensation could seldom be given and the em- 
ployee would not feel warranted in sacrificing his provision 
for old age for a slight increase in salary. 

The English experience in this connection is significant. 
The latest bills introduced into Parliament affecting the re- 
tirement systems for government employees have been con- 
cerned with facilitating transfer from one service to another 
without forfeitures. In the latest schemes regarding school 
teachers and university professors the founders have distinctly 
recognised the desirability of preserving mobility. 10 

10 The following extract from the Second Report of the Advisory 
Committee on the Distribution of Exchequer Grants to Universities 
(British Parliamentary Papers, 1912, Vol. XXII, London, 1913, p. 
4) : is a clear presentation of the argument for movement within 
the profession: 

"Many of the regulations contained in existing schemes are, and 
are probably intended to be, in restraint of retirement or acceptance 
of a post elsewhere. In many cases a beneficiary after years of 
service can only take a post in another university by sacrificing a 
portion of the sum which has been accumulated for his benefit. This 
restraint can only be justified, if it can be justified at all, by regarding 
the service of a single university as a profession comparative with 
the civil service. The truer view is that the teachers in all the uni- 
versities constitute a profession, and that transference from one 
university to another should not be accompanied by a financial pen- 
alty any more than is transference from one government office to 
another. It should be to the interest of the universities as a whole 
to cooperate in providing a moderate pension for all those teachers 
as the excellence of the staff will in certain measures depend on 
the pecuniary inducement to enter university service." 

229 



RETIREMENT OF PUBLIC EMPLOYEES 



The 

Objections 

Enumerated 



Encourage- 
ment of 
Resignation 



Increases 
Cost 



The Objections to the Benefit. Against a benefit in the 
event of withdrawal four arguments are advanced: (i) it 
prevents the retirement system from having the desired effect 
in retaining men in the sendee; (2) it actually encourages 
men to resign when in need of funds; (3) it weakens the dis- 
ciplinary powers of the superior officers and (4) it greatly in- 
creases the cost of the benefits. The first and third of these 
arguments have already been considered in the general dis- 
cussion of the desirability of the benefit. 

That it actually encourages men to resign when in need of 
money has been the experience in some funds embracing many 
wageworkers in the membership who are paid at approx- 
imately market rates. 11 They can easily secure private em- 
ployment and do so for the sake of getting possession of their 
accumulation. It is doubtful, however, if this difficulty would 
be experienced in dealing with a force engaged in more highly 
specialized work. This danger can be overcome, moreover, 
by providing that on resignation or dismissal the accumulation 
shall be left in the fund at interest, to be paid in event of 
death, disability or reaching the minimum superannuation age. 
It has even been suggested that if the employee resigning so 
desires he be permitted to continue his own contributions until 
the retirement age. 12 The objection therefore is one that can 
be easily overcome. 

Naturally a benefit in event of resignation or dismissal in- 
creases the cost of the benefits. The fund cannot sacrifice a 
profit of this kind and continue to sell its other benefits at the 



11 See testimony of Sir John McDougall regarding the London 
County Council. Thrift Fund given before the Royal Commission on 
Civil Service Superannuation, British Parliamentary Papers, 1903, 
Vol. XXXIII, p. 134, q. 3754. 

Also testimony of The Chief Constable of Sterlingshire before 
the Select Committee on the Police Superannuation (Scotland) 
Bill, British Parliamentary Papers, 1901, Vol. VII, p. 45, q. 1144. 

12 Archibald Hewat says that retention of membership in leaving 
the service is generally permitted in the Widows' Funds of the Scot- 
tish Banks. See his Experience of the Widows' Funds of Scottish 
Banks. 



230 



BENEFITS ON WITHDRAWAL 

same price. That is elementary. A good, all-round scheme 
must of necessity cost more tha',i one that protects only against 
a single risk. The employees if they are well advised would 
gladly assume the cost of a return of contributions in event of 
resignation or dismissal. In each individual case it would 
mean only a small addition to the premium, but in the excep- 
tional case where resignation seems the only course it would 
mean the difference between nothing and perhaps enough to 
take care of the employee for the rest of his life. 

The Amount of the Benefit 

The amount of the benefit, as was stated in the introductory 
paragraph of this chapter, would probably never exceed the 
contributions with interest under a wholly contributory sys- 
tem, nor their equivalent, the actuarial reserve accumulated 
to date, under a non-contributory system. The amount re- 
turned in event of resignation or dismissal in a wholly con- 
tributory system may with full and complete justice to the 
employee be less than the total amount of contributions with 
interest, if any of the benefits are in the nature of insurance 
against risks such as death or disability, against which the 
employee has been protected during his period of service and 
for which protection already received he should pay. Simi- 
larly, if the whole or any part of the costs of administering 
the system are included in the premiums and are charged to 
the employee, they would be deducted from the amount re- 
turned him, because it would be only fair that he should pay 
his share. Any further deductions are in the nature of penal- 
ties imposed on resignation or dismissal. 

Under a partly contributory system provision is not infre- 
quently made that on resignation or dismissal the employee 
shall receive his own contributions with interest, but that he 
shall sacrifice the government's contributions in his behalf, 
which are spoken of as payments contingent upon long serv- 
ice. Payments that are contingent upon long service are 

231 



RETIREMENT OF PUBLIC EMPLOYEES 

clearly contrar}- to the interests of the employee and to the 
general public and it is doubtful if they will survive in retire- 
ment legislation. The principles seem to be the same regard- 
less of who pays the premium. 



CHAPTER VIII 

A BENEFIT IN EVENT OF DEATH IN THE ACTIVE 
SERVICE, DEATH NOT CAUSED BY THE ACTUAL 
PERFORMANCE OF DUTY 

Objects Sought in Establishing the Benefit. Objections to Benefit. 
Government Not Interested: Cost Increased. Protection by Pri- 
vate Insurance Possible. Life Insurance Unnecessary Expense, 
the Widows' and Orphans' Fund. The Amount of the Benefit. 
Return of Contributions. A Special Benefit. Amount of Spe- 
cial Benefit in Relation to Salary. The Amount of Benefit in 
Relation to Length of Service. The Amount of the Special Benefit 
in Relation to the Economic Needs of the Family. The Cost of 
the Insurance Benefit. The Contributory vs. the N on-Contributory 
System for a Special Death Benefit. Adjustment to Other Bene- 
fits. Summary. 

Deaths in the active service must be divided into two 
classes: (i) those in which the death was the direct result 
of the actual performance of duty and (2) those in which the 
death was not directly due to the actual performance of duty. 
The present chapter is concerned with the second class, which 
is, of course, by far the more numerous and the more im- 
portant in developing a retirement system for an ordinary 
service. 

The Objects Sought in Establishing the Benefit 

The government seeks the establishment of a retirement By the 
system to provide for the elimination of the employees who 
have lost their efficiency through old age or disability. It 
has no immediate object to secure through providing a benefit 
in the event of death from ordinary natural causes; and its 
right to grant such a benefit as a pure benevolence, regard- 
less of need, at the expense of the taxpayer may be questioned. 
The main interest of the government in such a benefit is to 

233 



Government 



RETIREMENT OF PUBLIC EMPLOYEES 

pay the compensation it offers for services in a way that will 
meet the general requirements of the employees. As an em- 
ployer the government is to a peculiar degree dependent on 
preserving the good will and enthusiasm of its employees. It 
has to depend in a large measure on the attractiveness of its 
general service conditions to offset the loss of opportunity for 
marked financial success that exists in other callings. The 
interest of the government, therefore, in establishing a benefit 
in case of death from ordinary natural causes is to satisfy 
the requirements of the lives of the employees. 
By the The most general fear of the ordinary employee is early 

Employee d ea th before he has had an opportunity to make suitable per- 
manent provision for his dependents. This fear is greater 
even than the fear of total disability in early years because 
death is the more common calamity. It is of course far greater 
than the fear of total disability in old age because old age is 
so remote that few believe they will reach it, and they have 
difficulty in visualizing what their condition will be under such 
circumstances. A superannuation retirement system on the 
contributory basis which grants no return of contributions 
in event of death is therefore highly unpopular, because it 
makes the employees insure against a risk which they little 
fear, while it gives them no protection against what they re- 
gard as their greatest risk. Under a similar system operated 
on the non-contributory basis the same feeling will ultimately 
develop. The attitude of the employees will be that the fortu- 
nate who live profit at the expense of the dependents of the 
unfortunate who die, and since they will generally believe that 
they earn their benefits, the 1 ' will agitate to have this evil 
remedied. 
By the From the point of view of society the greatest danger is 

Public tji atj because of an early death of a breadwinner, children 

will be left dependent, to be cared for by relatives, friends, 
other private charity, or by the government. In the case of 
public employees it is a greater danger than early disability, 
because it is more common. It is probably more common, too, 

234 



DEATH BENEFIT 

than superannuation dependency. Public interest is undoubt- 
edly far better served by having citizens protect their depend- 
ent children by reasonable insurance against death than by 
having them protect themselves by insurance against de- 
pendency in old age. Failure to protect children during their 
natural period of dependency may force them into the period 
of economic productivity before they are in condition to ren- 
der efficient service. Cutting short the period for mental and 
physical development under normal conditions may result in 
permanent impairments that will lessen the person's productive 
capacity for life. In case of failure to provide for extreme 
old age, hardship and suffering may result, but the period dur- 
ing which it may last is comparatively short, and it has little 
effect on the productive capacity of society. Reasonable pro- 
vision against both dangers is probably of greater social utility 
than extreme protection against one at the expense of rea- 
sonable protection against the other, but if a choice were to 
be made by society in its own interest it would undoubtedly 
protect the rising generation. 1 

Objections to Benefit Enumerated 

Against the establishment of a benefit in the event of death The 
from natural causes four general arguments are advanced : Enumerated 
(i) the government as an employer has no interest in it; (2) 
it increases the cost of the retirement system; (3) it protects 
the employee against a risk against which he can easily protect 
himself through ordinary life insurance; and (4) it compels 
all to insure their lives regardless of their dependents, and life 
insurance for the man who has no one dependent on him is 
an unnecessary expense. 

Government Not Interested: Cost Increased. The first two 
of these arguments are the classic objections against including 

1 For a brilliant attack on the English system as it existed prior 
to 1909, because of the forfeitures in event of death, see "The Mis- 
chief of Pensions," by Michael Peters. The Gentleman's Maga- 
zine, Vol. 303, pp. 113-119, London, 1907. 

235 



RETIREMENT OF PUBLIC EMPLOYEES 

anything in a retirement system that is not directly and pri- 
marily in the interest of the government as an employer. The 
government, as was stated, is interested in including such a 
benefit in the system mainly because it will meet the needs of 
the employees and make them better satisfied with the condi- 
tions of service. The payment of such a benefit will, of 
course, increase the cost. It is significant, however, that the 
English civil servants preferred the reduction of the superan- 
nuation benefits promised them and the addition of a death 
benefit, the two combined to cost the government no more 
than the old superannuation benefit, to the retention of the 
old superannuation benefit with the forfeiture of all rights in 
event of death in the active service. 2 



Voluntary 
Insurance 
Incomplete 



Protection by Private Insurance Possible. In considering 
the argument that the death benefit protects the employee from 
a risk against which he can very easily protect himself by 
ordinary life insurance, the experience of the English civil 
service retirement system is particularly interesting. Before 
the civil servants succeeded in having a death benefit included 
in the retirement system, they had carried voluntary life in- 
surance to a high state of development. Of the several or- 
ganizations for securing life insurance, the largest and most 
significant was the Civil Service Insurance Society. Members 
of this organization were insured with a private insurance 
company which granted to the members a discount of fifteen 
per cent from the regularly established premium rates of the 
company. It was able to make this reduction, because it was 
at no expense for hiring agents to assist in getting the busi- 
ness, and because it had only very small costs for collecting 
premiums. Through an arrangement with the government, 
all premiums were withheld from the employees' salaries and 
were paid to the company quarterly. In cases where the em- 

2 Parliamentary Debates, House of Commons, Vol. 7, No. 88, p. 766. 
Quoted by H. D. Brown in Civil Service in Great Britain, Senate 
Document No. 290, 61 st Congress, 2d Session, p. 176. 

236 



DEATH BENEFIT 

ployee joined the society and took out his insurance policy 
on entrance into the service, the medical examination of the 
government examiners was regarded as sufficient, so that the 
company was at no expense for much of the medical work. 
This society was thus able to offer such favorable conditions 
that it was very popular. But voluntary insurance did not 
meet the situation. Improvident men who had not taken ad- 
vantage of their exceptional opportunities would die, and the 
penalty for their improvidence would be visited upon the 
widows and children. The not unnatural consequence was 
that the employees argued that the retirement system, which 
had been relieved of a liability to pay a superannuation or 
disability benefit by the death of the employee, should do some- 
thing for the widows and children. Repeatedly it was ex- 
plained to them that they were asking for something that the 
system had never promised them when they entered the serv- 
ice, that the apparent profits derived from the death of a mem- 
ber were what enabled the state to pay such large benefits on 
superannuation, and that they could easily protect themselves 
through life insurance. The average employee cannot get the 
point of view of the actuary. He judges a system on the 
basis of the results that it produces in individual cases, and 
when one of his fellow employees dies and leaves dependents 
he believes that the system owes something to that family. 3 

3 "It is obvious that the state gambles with its employee for his 
wages : 'I will give you a portion of your wage as you earn it ; 
the remainder we will toss for when I have finished with you. 
You yourself are the coin, with life on one side and death on the 
other. Live, you win; die, you lose.' These are briefly the terms 
of the contract. 'If you lose, part of your earnings is lost to your 
dependents; but if you win you take what is already yours plus a 
portion of what is properly due to another.' This is a gamble pure 
and simple ; as much a gamble as the State Lottery which is so 
popular in many countries, but which we in England do not counte- 
nance because it is immoral. It is a simple game, and, seeing that 
a love of speculation is inherent in human nature, the individual 
party to the contract is not altogether ill pleased. But there are still 
his dependents to be considered, and the scheme should also be re- 
garded from their point of view. 

It is in no wise to be inferred that the state gambles for her own 

237 



RETIREMENT OF PUBLIC EMPLOYEES 



Voluntary 
Assessment 
Beneficial 
Societies 



Under a contributory system the low paid and the improvi- 
dent will argue that the contributions which they are required 
to make to pay for their superannuation and disability benefits 
are so great that it prevents them from carrying any life in- 
surance. Under a non-contributory system, the argument is 
varied a little. Benefits under the retirement system will be 
spoken of as deferred pay, and theoretical deductions from 
salary will be mentioned. Then it will be said that the amount 
of actual salary paid is insufficient to permit of carrying life 
insurance. An excuse will be found for failure to insure vol- 
untarily in private companies and for making a demand on 
the system for consideration. 

The absence of a death benefit in the retirement system re- 
sults, moreover, in the establishment of voluntary beneficial 
societies, frequently on the assessment basis. The history of 
these assessment associations is frequently pathetic. Somebody 
in the service dies, and once again the hat is passed. A sugges- 
tion is made that the thing be systematized, that an associa- 
tion be formed, that each member be required to pay so much 
on the death of a fellow member and that the proceeds be 
turned over to the widow or children. It is such a simple 
device with so many rather appealing fraternal features, it is 
too bad that it will not work. All goes well at the outset. 
Few die; therefore, few collections are made. The moving 
spirits in the organization can show a prospective member 
how little it costs to insure with the society as contrasted with 
the cost of insuring in an old line life insurance company, and 



direct benefit; rather it is merely a case of robbing Peter to pay Paul. 
But Peter suffers none the less. What happens is somewhat as fol- 
lows : Peter dies before he is pensionable. The total deductions 
made by government from the marketable value of his labours on 
account of pension thereupon become lost to his dependents who by 
reason of the early loss of Peter's wage-earning capacity need it 
more than if he had lived — and go instead to make up Paul's pension 
when he retires, whose dependents, by reason of Paul's two hands 
being still available, need it perhaps less than do the defrauded 
relicts of Peter." — "The Mischief of Pensions," by Michael Peters, 
The Gentleman's Magazine, Vol. 303, p. 116. 



238 



DEATH BENEFIT 

therefore the membership grows. Later, as the average age 
of the members increases, deaths become more numerous and 
the cost of the insurance goes up. Presently all young new 
entrants to the service find that they can insure for less with 
an ordinary life insurance company than with the benevolent 
association; therefore, they decline to join. The membership 
falls off, and consequently the amount of the death benefit 
declines. Some old employees who have always counted on 
the beneficial society as a sound institution will learn toward 
the end of their lives that it was actuarially unsound and that 
although they have paid into it for years their dependents will 
get nothing from it when they die. It is a striking fact that 
such associations are permitted to exist in public services, the 
legislative directors of which have recognized the necessity of 
regulating and supervising private insurance organizations. 
That the establishment of a death benefit under the retirement 
system will largely eliminate assessment associations is an 
argument in its favor. 

If the service contains a large number of wage workers, insurance 
the retirement system can provide life insurance for them at at Cost 
rates far lower than the industrial insurance companies can 
afford to give. In such insurance a comparatively large part 
of the premium has to be used to pay the heavy expense of 
collecting the premiums. A government retirement system 
can collect its premiums by withholding them from the salaries 
or wages, and under a system properly organized the accounts 
need be only a little more elaborate than the ordinary payrolls. 
The actuarial work involved will be scarcely increased at all, 
because the actuaries will have to determine the death rate, 
whether deaths involve profit or loss to the fund. This 
same general argument applies in a less degree to ordinary 
life insurance. The retirement system can sell insur- 
ance at cost with a very small expense for administration, 
whereas a private insurance company, even on a mutual 
basis, cannot sell it for so little because their administra- 
tion expenses will necessarily be higher, since they will 

239 



RETIREMENT OF PUBLIC EMPLOYEES 

have to duplicate many of the records of the government 
system. 

The argument that the employees can insure their lives pri- 
vately seems, therefore, not a conclusive objection, because 
the retirement system can grant the benefit at minimum addi- 
tional cost, it can provide for the conduct of the employee's 
insurance on a sound basis, it can make it compulsory, and it 
can meet the almost inevitable ultimate demand of the em- 
ployees for a death benefit under the system. 

Differences Life Insurance Unnecessary Expense — The Widows' and 
in widows' Orphans' Fund. The final objection is that it compels all to 
and insure their lives regardless of their dependents; and life in- 

Orphans' r b , , , , , . . 

Fund surance for the man who has no one dependent on him is an 

unnecessary expense. This argument has been directed more 
particularly against benefits payable only to widows and 
orphans; and as applied to widows' and orphans' benefits, it 
is not without great weight. 4 Under either a contributory 
or non-contributory system, the cost is generally borne by all 
employees more or less equally, whereas the interests of the 
employees in the benefits are entirely different. The great 
body of women employees are single, and expect to withdraw 
from the service in event of marriage and motherhood. The 
few women employees who have children are usually widows. 
They have no beneficiary to correspond to the wife of a mar- 
ried man, and their children are on an average older than 
the children of married men of the same age as the woman 
employee. The older the children, of course, the less the need 
for a benefit, and the less a benefit will cost. In an orphans' 
benefit fund a provision is generally inserted that no payments 

4 For a particularly good discussion of widows' and orphans' funds, 
see testimony of Mr. James Huggett before the British Royal Com- 
mission on Civil Service Superannuation. Mr. Huggett was Secre- 
tary of the Widows' Fund of the Civil Service Insurance Association, 
and had given deep thought to the advisability of establishing a com- 
pulsory widows' and orphans' fund for the British Civil Service. — 
Report of Royal Commission on Civil Service Superannuation, Brit- 
ish Parliamentary Papers, 1903, Vol. XXXIII. 

240 



DEATH BENEFIT 

shall be made after a child has reached a given age, or after 
the youngest child has reached that age. Women employees, 
therefore, have comparatively little interest in a widows' and 
orphans' fund, and if one is established special provisions 
should be inserted to give just treatment to the women em- 
ployees. 

The interests of the male employees in such a fund vary 
widely according to their marital condition, their age, the 
age of their wives if married, and the number and ages of 
their children. The interests of bachelors vary according 
to the probability of their marrying and having children, 
which probability is undoubtedly strongly affected by their 
ages. The interests of married men vary according to the 
ages of their wives and the number and ages of their chil- 
dren. The old man with a young wife is a serious problem 
for a retirement system, because she may become a widow 
at a very early age and may herself live to a ripe old age, 
drawing a pension from the system regularly every year. 
Young women have sometimes been accused of marrying old 
men for the pension privilege, and several widows' and 
orphans' funds have considered it advisable to adopt some 
precautionary measures to guard against this, such as limit- 
ing the number of possible pension payments, reducing the 
amount of pension payments in case of great disparity in 
ages, or charging a special marriage premium at the time 
of marriage, based on the difference between the ages of hus- 
band and wife. The interests of the widowers vary according 
to the number and the ages of their children and the prospects 
of their remarriage, which are doubtless largely influenced by 
their ages. The number of variables is so great that even 
in a large service few men will be found who have exactly 
the same interest in a widows' and orphans' fund. 

To attempt to work out a system of premiums that would Premium 
permit every man to pay according to his interest would ob- JjJJJabiy 
viously be too complicated to be practicable, whereas to dis- Impossible 
regard entirely the factor of individual interest is likely to cause 

241 



RETIREMENT OF PUBLIC EMPLOYEES 

friction among different classes of employees. 5 When the ben- 
efit in event of death in the active service was introduced in 
the English system in 1909, the decision was against a widows' 
and orphans' benefit and in favor of a lump sum payment to 
the legal representative of the employee. 6 
A Flexible A compulsory insurance for a reasonable amount, payable 
to the legal representative, who may be directed to pay it to 
a designated beneficiary, is a flexible provision that enables 
the employee to apply the benefit to the needs of his family 
or to the needs of his estate as his judgment directs. Its very 
flexibility makes it less open to the objection that it compels 
insurance regardless of dependents, because few cannot so 

5 "I should like to say that I have a distinct preference for a com- 
pulsory widows' annuity system, because you then are providing for 
the people you want to provide for; but I am afraid, if you had a 
compulsory annuity system, the same state of things would happen 
as happened in the India Office. The young unmarried men would 
say: 'I am not going to subscribe for the wife and children of So- 
and-So/ The India office wrecked a first rate scheme they had 
because the young men objected to paying for other men who were 
married. It is this attitude of the men which makes it necessary to 
advocate a compulsory insurance scheme instead of a compulsory 
annuity scheme." — Mr. James Huggett, Secretary of the Widows' 
Fund of the Civil Service Insurance Association, testifying before 
the Royal Commission on Civil Service Superannuation, British Par- 
liamentary Papers, 1903, Vol. XXXIII, p. 52, q. 1524. 

6 See the Superannuation Act, 1909. The following testimony re- 
garding the Customs Annuity and Benevolent Fund given before the 
Royal Commission on Civil Service Superannuation (British 
Parliamentary Papers, 1903, Vol. XXXIII, p. 112, q. 3145 and 3146), 
is of interest in this connection : 

3145. That fund has existed for a great many years — since 1816. 
It was founded by a special Act of Parliament for the purpose of 
enabling officers and clerks belonging to the Customs Department to 
make provision, by means of life insurance, for their widows and 
other relatives or nominees. Originally, the evident expectation was 
that men would more frequently insure for annuities for their widows 
than for anything else ; but the greater freedom and advantages given 
by ordinary insurance for lump sums as compared with fixed annui- 
ties for widows, make it practically be turned into a life insurance 
society, pure and simple. 

3146. A sort of survival of the fittest has established the principle 
of life insurance against that of providing annuities. — Yes, that is so. 
It has been found that the annuity system is too hard and fast as 
compared with the flexibility of life insurance. 

242 









DEATH BENEFIT 

arrange their affairs as to be able to utilize to advantage a 
lump sum to be paid on their death. Under a widows' and 
orphans' fund, with uniform contributions for all men of 
the same age, a bachelor who has remained single because of 
family responsibilities, to assist his parents or to care for and 
educate younger brothers and sisters, has to pay for a benefit 
which cannot be applied to aid his dependents ; but under the 
system paying the benefit in a lump sum to the legal repre- 
sentatives, he could direct its application to meet the exact 
needs of his dependents, to purchase a small annuity for aged 
parents, to pay for the education of a younger brother or 
sister, to start a brother in business, or anything else that his 
judgment might direct. It is significant that a plebiscite of the 
English Civil Service, conducted through the Deferred Pay 
Committee, found eighty per cent of the employees in favor of 
the recommendations of the Courtney Commission of 1902 for 
a reduction in the superannuation benefit and the establish- 
ment of a benefit in the event of death in the active service. 

The Amount of the Benefit 

The weight of the objection against a benefit in event of Two 
death, that it is compelling life insurance regardless of the j^i^g 
need for it, will clearly depend in part on the amount of the 
benefit. In respect to the amount provided, schemes may be 
divided into two broad classes. The first includes those in 
which the size of the benefit is directly dependent on the 
amount of the contributions made to the fund by or in behalf 
of the employee, or their equivalent value under a system 
operated on the assessment or cash disbursement basis. The 
maximum benefit under a system falling in this class would 
be a return of all contributions or their equivalent with com- 
pound interest. Partly contributory schemes that provide for 
the return of the employee's contributions only, with or with- 
out interest, belong, of course, in this class. The second class 
includes schemes in which a definite or special benefit is pro- 
vided that bears no fixed relationship to total contributions, 

243 



RETIREMENT OF PUBLIC EMPLOYEES 

or their equivalent but pays a benefit similar in nature to that 
secured through the purchase of a life insurance policy. Un- 
der a wholly contributory scheme that does not permit the 
other benefits to profit from the death of a member, the gen- 
eral arrangement for a special life insurance benefit would 
be that the employees who die in the early years of service 
receive more than their own payments with interest, whereas 
those who die in the later years receive less. 

A _ Return of Contributions. The return of the employee's 

Provision own contribution without interest in event of death in the 
active service is probably the minimum provision that can be 
made in the event of death in the active service under a con- 
tributory system. Unless a return is allowed, cases will arise 
in which deductions are made from the salary paid to the 
wife of the employee, when the employee himself died sud- 
denly just before pay day, or when the employee was on his 
death bed. The employees can never see the justice of a deduc- 
tion for a superannuation benefit when it is already known that 
the employee will never receive one. Such cases are, of course, 
extreme ; but they are the grain of seed for a large grievance. 
Payment of interest on the employee's contributions will 
undoubtedly prove necessary ultimately, and hence is advisable 
from the outset. The employees will argue that if their claim 
to the contributions themselves is good, then it would logically 
follow that their claim to the earnings of their contributions 
is equally good. 

The demand for a return of contributions will probably 
extend ultimately to the payments made by the government 
in behalf of the employee. Under the non-contributory Eng- 
lish scheme operated on the assessment or cash disbursement 
plan, the movement led by the deferred pay committee took 
the form of a demand for the return of the theoretical de- 
ductions from salary which the employees asserted were made 
by the treasury in fixing salaries to allow for the cost of the 
pensions. Conceivably the return of the employee's own con- 

244 






DEATH BENEFIT 

tributions with interest might satisfy that sense of justice — 
general among employees under a retirement scheme — that 
demands that something be done for the family in the pres- 
ence of death. 

If it be conceded that the benefits under a retirement system 
are part of the compensation earned by the employee, the non- 
payment of the government's contributions toward the super- 
annuation benefit, in event of the death of the employee in 
whose behalf they were made, would have to be justified by 
approximately the following argument. The government, be- 
ing solely interested in getting rid of the superannuated and 
disabled, makes its contributions to provide only superannua- 
tion and disability insurance. It withholds indirectly from 
the active pay only a sufficient amount to provide such insur- 
ance. The apparent profits to the system resulting from the 
death of an employee prior to retirement are utilized in paying 
benefits to those who survive. If a death benefit in the form 
of a return of the government's contribution were to be pro- 
vided, either more would have to be withheld from the em- 
ployees or be paid by the government or else the amount of 
the superannuation and disability benefits would have to be 
reduced. Actuarially this argument, if supported by the facts, 
is unquestionably sound. The expediency of depending upon 
it in that difficult relationship which exists between employer 
and employee is doubtful. 7 

7 The argument from the point of view of the Actuary is thus stated 
by Mr. McLaughlan in his "Fundamental Principles of Pensions 
Funds," Transactions of the Faculty of Actuaries, 1908-9, p. 223 : 

"If a member died and his representative asked for a return of 
contribution they would be told that he had had the full value of his 
money in the shape of protection against destitution through failure 
of his powers of work and that he had no more right to a return of 
his contributions than the man who has insured his house against fire 
has to a return of his insurance premium if the house has not been 
burned. 

The more the system of making returns of contributions is ex- 
tended, the more does the character of the institution depart from 
that of a Pension Fund and approach that of a Savings Bank. Of 
course, if the members prefer the Savings Bank principles, the fund 
could be worked in that way." 

245 



RETIREMENT OF PUBLIC EMPLOYEES 

A Special Benefit. If the element of insurance is intro- 
duced into the benefit in event of death in the active service, 
and the benefit is made something more than a suitable return 
of contributions or their equivalent, many possible devices 
suggest themselves. The discussion regarding them has to be 
based more on theory than on records of their operation, be- 
cause this branch of retirement legislation apparently has not 
been so fully developed. Indeed many persons will doubtless 
consider that a retirement system has gone as far as it should 
when it gives a return of all contributions with interest or its 
equivalent in event of ordinary deaths. Others see in retire- 
ment systems a type of social insurance and are anxious to 
have them developed to the point where they give reasonable 
protection to the employee and his family against all the more 
important and more common dangers of life. Such benefits 
in event of death can conveniently be termed special benefits, 
to distinguish them briefly from the more common return of 
contributions. 

The Types Amount of Special Benefit in Relation to Salary. The spe- 

Described c j a j benefits in their relationship to salary can be classified 

under the three familiar groups (i) entirely independent of 

salary, (2) directly dependent on salary, and (3) indirectly 

dependent on salary. 

Those entirely independent of salary include the three fa- 
miliar subclasses (a) the discretionary amount, (b) the fixed 
amount, and (c) the amount which a fixed annual premium 
will buy. A possible fourth is, (d) the amount determined 
by the number and the type of the dependents. 

Those directly dependent on salary allow the employee a 
certain proportion of his salary in event of death and may be 
based either on the average salary throughout service or on 
the terminal salary or one of its variations. 

Those indirectly dependent on salary give the employee that 
amount of insurance which a certain proportion of his salary 
will purchase if paid as an annual premium. 

246 



DEATH BENEFIT 

The discretionary amount, duly protected by maximum lim- The Dis- 
itations, is open to the same fundamental objections that apply Amount^ 
to all discretionary benefits, and have already been considered 
at length in the two preceding chapters. Under ordinary 
political administrations it would mean granting the maximum 
benefit in most cases with a few objectionable discriminations; 
though if the tax rates were directly affected the reverse might 
be the case, low payments as a general rule with the maximum 
to persons with strong political influence. Under able admin- 
istrators highly developed rules to govern the grants might 
be worked out. These would doubtless be similar to the gen- 
eral rules followed in organized charity work and might con- 
sider the number and type of dependents, their need, and their 
moral character. Consideration of need and of moral char- 
acter, however, mark the grant with the brand of charity and 
may easily result in rewarding the less thrifty and deserving 
at the expense of those who have made provision for their 
own. 

If the number and the type of dependents are to be 
considered, definite rules could be specifically included in the 
law, thereby eliminating the palpably dangerous features of 
discretion. 

The scheme that bases the benefit on the number and the The Sum 
type of the dependents approaches the widows' and orphans' Number of 
fund. If the system is contributory and does not adjust the Dependents 
amount of the contributions to the number of pensionable 
dependents the employee has at the moment he pays the con- 
tribution, it is likely to cause friction and may result in grave 
injustice if an employee has someone dependent upon him 
who does not fall within an established class. This difficulty 
can be reduced but not entirely overcome by placing bachelors 
in a separate class and either making no deductions from them, 
or by placing the deductions in a special savings account to 
accumulate, to be applied as a single premium in purchasing 
an insurance in the event of the employee's marriage or to be 
paid to his estate in the event he dies single. Wide variation 

247 



RETIREMENT OF PUBLIC EMPLOYEES 

would remain, however, in the comparative interests of dif- 
ferent married men and widowers. 
The Fixed The fixed amount independent of salary, say, for example, 

Independent an insurance of $i,ooo, is probably applicable in forces where 
of Salary a vj fa e employees enter at approximately the same age, and 
receive approximately the same salaries and increases of 
salary. If the salaries vary widely, such a scheme may pro- 
duce dissatisfaction among the more highly paid men on the 
ground that proportionately less provision is made for them 
than for the lower paid employees, and a demand may arise 
for a provision relating the amount of the insurance di- 
rectly, or indirectly, to salary. Under a wholly or partly con- 
tributory system, which recognized the equities as between 
different employees, the contributions paid by the individual 
employee would have to increase from year to year as he ad- 
vanced in age, to meet the increased cost of insurance at the 
older ages, or else the premiums would have to be leveled so 
as to remain constant throughout service, over-payments at 
younger ages being accumulated at interest to offset under- 
payments at later ages. Under an equitable scheme providing 
premiums thus leveled, the amount of contribution required 
would necessarily vary with the age of the employee at en- 
trance. The young entrant would be called upon to pay far 
less than the older entrant. The fixed amount of insurance 
under a level premium could not be greater therefore than the 
old entrant could afford to purchase; and if the premiums 
were not leveled it could not be greater than the older em- 
ployees could afford to purchase. Leveling would undoubt- 
edly be necessary because the constant increase in contribu- 
tions with advancing age would be very unpopular. If, there- 
fore, the scheme were to be wholly or partly contributory, 
and if the ages at entrance varied widely, the fixed amount of 
insurance would probably have to be so small as to render the 
device inapplicable, even if all salaries were approximately 
equal. 

A provision requiring the payment of a fixed sum as an 

248 



DEATH BENEFIT 



annual premium toward the purchase of life insurance, and 
basing the amount of the death benefit on the purchasing 
power of that fixed sum, is a device which might meet the 
need of services which have an appreciable variation in the 
ages at which men enter and a fairly uniform rate of salaries. 
The amount of premium under such a system can be fixed at 
a figure which all can pay without real hardship. Under the 
level premium arrangement, the younger entrants will get a 
larger benefit than the older entrants, but each will get what 
it is considered he can reasonably afford. Such a device, how- 
ever, would probably not prove satisfactory if salaries varied 
very widely. 

Relationship between the amount of the special death bene- 
fit and the rate of salary can be made direct or indirect. If 
the relationship is direct, and if the system is operated on 
the actuarial reserve basis with leveled premiums, the salary 
scale has to be used in determining the amount of the pay- 
ments to be made. The use of the salary scale for this pur- 
pose is open to the same objections that were discussed at 
length under the superannuation benefit. 8 Such a device, 
however, permits of granting a definite proportion of salary 
in event of death, and might prove popular under a non-con- 
tribution system. 

To eliminate the use of the salary scale, and at the same 
time to provide some relationship between the amount of the 
benefit and the rate of pay, resort would have to be had to 
basing the amount of benefit on the amount of the premiums 
paid, which would in turn depend on the salary. 

A simple procedure would be to require each employee upon 
entrance to pay a certain percentage of his salary toward a 
special life insurance benefit. The amount of the benefit would 
be the amount of insurance which this premium would pur- 
chase at the age of the employee on entrance. The number 
of dollars of premium and the number of dollars of insur- 



The Fixed 
Premium 



A Fixed 
Proportion 
of Salary 



The 
Amount 
Indirectly 
Dependent 
on Salary 



9See pp. 127-137. 



249 



RETIREMENT OF PUBLIC EMPLOYEES 



The Unit 
System 



ance, as thus fixed at entrance, would remain constant 
throughout service. 

This device could be elaborated to give a closer relation- 
ship to final salary by providing that the percentage of salary 
required to be invested in life insurance should remain fixed 
throughout service, and that whenever an employee was pro- 
moted, the new amount which thus became available for life 
insurance should be used to purchase a new policy of what- 
ever amount it would buy at the age of the employee at the 
time of the promotion. In case the steps of promotion were 
small, special salary classes might be established for the pur- 
pose of arranging a special benefit in event of death, and 
whenever an employee passed from one class to another, he 
might be required to take out further insurance. 

More promising, perhaps, than any of these devices is that 
of establishment of a small unit of life insurance benefit, so 
small that the oldest entrant at the lowest salary can afford to 
purchase at least one. The number of these units that the 
employee is compelled to purchase may be made dependent 
on two factors, his age at entrance and his salary at entrance. 
Purchase of additional units with increases of salary may be 
required or it may be made optional. The privilege of pur- 
chasing a limited number of additional units without any in- 
crease of salary may be granted. In a general way this plan 
is the one suggested in the proposed system for New South 
Wales, and it appears to provide the flexibility in death bene- 
fits that is desirable. 9 



The Nature 
of the 
Benefit 
Based on 
Length 
of Service 



The Amount of Benefit in Relation to Length of Service. 
If the death benefit is merely a return of contributions or of 
the actuarial reserve accumulated in respect to other benefits, 
a natural relationship exists between length of service and the 
amount of the benefit. If, however, a special benefit in event 



9 Establishment of a Superannuation Fund for the whole of the 
Government Service : Report of the Committee and of the Actuarial 
Sub-Committee, Sydney, New South Wales, 1912. 



250 



DEATH BENEFIT 

of death is desired, the founders of the system can if they so 
desire arrange a system that will make the amount either en- 
tirely independent of length of service or directly or indirectly 
dependent on it. It is doubtful, however, if any fixed relation- 
ship between the length of the employee's service and the 
amount of his benefit in event of death is really desirable. 
Such a device undoubtedly would tend to keep men in the 
service, and under a non-contributory system it has an appear- 
ance of justice because it does more for the old and faithful 
employee than it does for the new entrant. Under a wholly 
contributory system, which is the real test of the equities as 
between the individual employees, it would require apparently 
one of two devices if equitably operated: (i) a constantly in- 
creasing premium as service advances, which would, of course, 
prove very burdensome to those to whom increased service 
did not bring corresponding increases in compensation or in 
ability to pay, (2) a leveled premium requiring in the early 
years of life exceptionally high payments in proportion to 
the risk and the amount of benefit to permit low premiums 
in the later years. 

The main objection, however, to a relationship between Social 
length of service and the amount of the special death benefit to Benefit 8 
is that it fails to recognize the history, or development, of the Ba sed on 
economic need of the average family. 10 The average employee, Service 
who may conveniently be spoken of in this discussion simply 
as the employee, reaches the period of maximum importance 
to the economic welfare of his family when he is from thirty- 
five to forty-five years of age. After he has passed forty- 
five, the extent to which the family is dependent upon him for 
absolute necessaries diminishes rapidly. When the employee 
is between thirty-five and forty-five, the number of children 

10 For an excellent statistical demonstration of the development of 
this need see Widows' and Orphans' Pension Funds, by S. J. H. W. 
Allin in the Journal of the Institute of Actuaries, 1905, Vol. 39. See 
also Section III, "Statistics of Family History in Part II of the 
Report on the Pension Funds of the City of New York," New York, 
1916. 

251 



RETIREMENT OF PUBLIC EMPLOYEES 

under eighteen years of age is generally at its maximum, as 
is the average number of years provision, per dependent, 
which would have to be in hand, in event of the death of the 
father, if the children are all to be carried along as dependents 
until they have reached the eighteenth year. The widow of 
the employee who dies in this important decade of life is, 
therefore, left with a maximum financial burden. It is the 
period in her life when she is called upon to render the max- 
imum service to her children as a mother and home-maker 
and when they will lose the most if she is called upon to take 
up the burden of their economic support. She is still too 
young to be much assisted by her children, and her parents 
and her husband's parents, if living, can be of assistance only 
if they are working fairly late in life or have accumulated 
property. After the average employee passes forty-five, how- 
ever, his family responsibilities diminish rapidly. His chil- 
dren are approaching and passing the age at which they be- 
come economically independent or can sustain themselves if 
the father dies. The life expectancy of the mother is dimin- 
ishing rapidly, and the amount that would be required to pur- 
chase her an annuity for the balance of her days is decreas- 
ing. Even if she were forced to work, as is less likely than 
when an employee dies at an early age, she could more easily 
perform dual duties, because the household responsibilities 
would have very greatly diminished. She would, more- 
over, have the assistance of older children. The family would 
have few dependents from the older generations. It would 
follow from these facts, therefore, that any device that limits 
the insurance in the years after marriage and before forty- 
five for the sake of increasing it in the years after forty-five 
is contrary to the interests of the employee and contrary to 
the interests of society. 

Two The Amount of the Special Benefit in Relation to the Eco- 

Poi P nts tant nomic Needs of the Family. In considering the amount of 

benefit in its relation to the economic needs of the family, two 

252 






DEATH BENEFIT 

points from the preceding discussion must be kept in mind 
constantly: first, the needs of different employees for life in- 
surance may be very different because of differences in the 
number, types and ages of their dependents; and, second, the 
need of any one individual employee for such insurance may 
vary widely during the course of his career. In reaching a 
decision as to the amount of the superannuation benefit and 
of the disability benefit, one knows at least that the employee 
exists and must be provided for, but in dealing with a death 
benefit one knows that the employee has passed on and that 
in one extreme case he may have left no dependents, whereas 
in another extreme case he may have left dependents of all 
classes. If an attempt is made to establish a death benefit 
sufficient to grant a minimum of subsistence to the average 
family, if the father dies at an average age, the average is 
being overworked, because to determine what the average 
family is at the average age of the father at death, one has 
to average the widows' ages, and average the number of chil- 
dren and their ages. Actuarially doubtless it could be done. 
Mr. George B. Buck has worked out excellent family history 
data for his valuations of certain of the New York city pen- 
sion funds, in which widows', orphans' and other dependents' 
benefits are involved, but, naturally, methods of averaging 
have to be resorted to to reduce the vast mass of detail to 
workable proportions. 11 For the purpose of determining the 
extent of the liability involved by such benefits and for operat- 
ing a fund on a sound basis, the method of averaging, in 
skillful hands, is, of course, above criticism; but to base the 
amount of benefit on it is a different matter. The cases of 
extreme deviation from the average would be cases of hard- 
ship; in the one instance because the employee would never 
derive any benefit, and in the other because the amount of 
the benefit would be insufficient to fulfill its purpose. To de- 
termine the amount of benefit by the number, type and ages 

11 See Report of the Pension Funds of the City of New York, 
P. II, New York (1916), § III, pp. 307-365. 

253 



RETIREMENT OF PUBLIC EMPLOYEES 



Necessity 
for Preser- 
vation of 
Disability 



Methods of 

Preserving 

Flexibility 



of the dependents may increase the unfairness to those with 
few or no dependents, and may promote hostility to the sys- 
tem among a considerable body of employees. The safe rule 
in establishing a death benefit would seem to be, therefore, to 
preserve flexibility. 

The general theory upon which society has proceeded for 
a long time is that the man himself is the best judge of the 
needs of his own family. In establishing a retirement system, 
the government departs from this general theory and compels 
him to accept part of his compensation in the form of retire- 
ment benefits in order that the government may protect itself 
against certain evils which were found to exist under the 
system that gave the man all his financial compensation in the 
form of immediate wage. Unless the government preserves 
flexibility in any special death benefit it may provide, it is 
perhaps carrying compulsion further than it should. It is 
doubtful whether the government is well advised in com- 
pelling a man to take part of his compensation not only in 
life insurance but life insurance of a particular form, and in 
depriving him of an opportunity to exercise his judgment as 
to what form of life insurance is required to meet his par- 
ticular needs. 

Flexibility is obviously to be secured first by having com- 
pulsory life insurance reduced to a reasonable minimum, and 
second by having it so arranged that the employee can change 
the beneficiaries under his policy as his own conditions of 
life vary. The system can well provide for optional insur- 
ance benefits which the employee can purchase from the sys- 
tem from time to time as his judgment directs. These op- 
tional benefits could well be offered in considerable variety 
with special emphasis on policies which would insure the em- 
ployees not for their whole lives, but for a term of years, say 
from the time they purchased the policy up to the compulsory 
age of retirement, when an employee could protect his wife 
for life, if she is living at the time of retirement, by selecting 
a last survivor annuity as the superannuation benefit. The 

354 



DEATH BENEFIT 

merit of these term policies is that they can be sold cheaply 
because they do not necessitate a payment in every case. For 
the money that would buy only a dollar of insurance for life, 
an employee can frequently get two dollars of insurance for 
a short term. An adequately developed set of optional poli- 
cies would permit the employees to meet their needs. By pro- 
viding cash surrender values, it would be possible, too, for the 
employees to readjust their affairs to meet their changing fam- 
ily responsibilities. 

The inclusion of life insurance features is clearly to the 
advantage of the system from the actuarial point of view. 
Much of its business is necessarily dealing in annuities. If 
the expectation of life of the employees is gradually increas- 
ing, the system may from time to time be obliged to increase 
the rates it charges, because it is taking more money to pay 
the benefits over the longer period during which the employees 
are living. The insurance branch of the system manifestly 
operates in exactly the opposite direction. If the employees 
live longer, more payments into the fund on account of life 
insurance are made and they are at interest longer before 
drawn out to pay a death claim. Increasing expectation of 
life means, therefore, a decreasing insurance charge. If both 
annuities and insurance are sold by the one system, the 
changes tend to neutralize each other and to promote both sta- 
bility of the fund and stability of the joint rates. The gov- 
ernment, therefore, by offering these optional insurance bene- 
fits, substantially at cost to its employees, gives stability to its 
funds and promotes the general economic and social welfare 
of its employees. 

The Cost of the Insurance Benefit 

The cost of life insurance benefit under a system that pro- The Factors 
vides for the payment of a fixed amount on the death of an nvo ve 
employee in the active service from causes not directly at- 
tributable to death in the actual performance of duty, would 
depend in general upon five factors : ( i ) the age at entrance 

255 



RETIREMENT OF PUBLIC EMPLOYEES 






into the service, (2) the age at which active duty ceased, (3) 
the amount of benefit, (4) the rate of mortality from ordi- 
nary causes, and (5) the rate of interest. Obviously the 
earlier the age at which the employees go to the retired rolls, 
the shorter will be the period of active service within whicl 
they will be exposed to the risk of death. The risk of death, 
moreover, is less in the younger years than in the later, and 
consequently it costs less to insure a man of thirty against 
death before he is sixty than it costs to insure a man of thirty- 
five against death before he is sixty-five, though the two serv- 
ice periods are the same. The operation of the other factors 
has already been sufficiently discussed in the two preceding 
chapters. 

If the system required each employee to pay for his own 
special insurance, the premiums would vary according to the 
age of entrance and the sex of the employee, and if the serv- 
ices had many different distinct types or classes of employees, 
some allowance might have to be made on that score. These 
subjects, too, have been sufficiently considered in the preceding 
chapters. 



Special 

Reasons 

Why 

Employee 
Should 
Bear Cost 



Optional 

Benefits 



The Contributory Versus the Non-Contributory System for 
Special Death Benefit 

The question of the contributory as opposed to the non- 
contributory system requires brief mention in connection with 
the special death benefit from ordinary causes not arising in 
the performance of duty. The government as an employee 
is concerned with the provision of this type of a benefit only 
in so far as the employees desire to have it made a part of 
the system, unless it adopts it partly to give financial stability 
to the fund. The argument in favor of having the cost of 
such a benefit borne by the employee would, therefore, seem 
stronger in the case of this benefit than in the case of the 
others. It would appear especially desirable that the cost of 
all optional benefits should be borne solely by the employee. 
The suggestion is sometimes made, however, that the gov- 

256 



DEATH BENEFIT 

ernment, to stimulate the employees to insure adequately, shall 
pay for half of any optional benefits the employee may select. 
The justice of such a procedure is hardly apparent, as it per- 
mits an employee to increase his compensation above that of 
a fellow employee who may be doing better work but who may 
not be in position to take out further insurance. If the gov- 
ernment is to make appropriations to stimulate life insurance, 
it would seem as if it should extend the privilege equally to 
all citizens and not establish a specially privileged class whose 
optional insurance is paid for in part by the public. 

The employee who resigns or who is dismissed is clearly Return of 
not entitled to a return of all he has paid toward a life insur- ^on^on" 
ance benefit. As in the case of a benefit insuring him against Withdrawal 
disability, he has had the protection of insurance during the 
time he has served; had he died in that time he would have 
received the full benefit. His contributions have been used 
in part to pay the benefits of those who, being less fortunate 
than himself, have died. The remainder of his contributions 
has been accumulating as a reserve at interest, so that the 
premiums which he has been paying will not have to be raised 
in later years when the number of death benefits to be paid 
becomes large. To a return of this reserve, or at least a part 
of it, the employee is doubtless entitled. The government 
might with some justice claim the right to retain a reasonable 
part of this reserve to reimburse it for the expense to which 
it has been put, but it would be a small matter, as many of 
the resignations come within the first few years before much 
of a reserve has accumulated. The employee, however, can- 
not justly demand the whole of his contributions; his max- 
imum reasonable demand is for the entire reserve. 

Adjustment to Other Benefits 
The adjustment of the special life insurance benefit to the The Term 
superannuation benefit, and more especially to the disability i nsur l n ce 
benefit, requires some consideration. As was pointed out 
above, the term during which the employee's life is covered 

257 



RETIREMENT OF PUBLIC EMPLOYEES 

by insurance — that is, the period within which the amount 
of the policy will be paid in case the employee dies — can, of 
course, be varied to meet the needs of the system. The two 
most probable terms are, (i) the life of the employee, and 
(2) the period of active service. The period of active service 
makes the system more nearly conform to the economic needs 
of the family, and allows the employee for the same premium 
to carry more protection at the time of life when he most 
needs it, but if he lives beyond the term he gets no monetary 
return, but he has had and enjoyed the larger protection. Un- 
der this term policy he must look to the superannuation bene- 
fit for his sole protection after retirement. Under a life term 
policy he is certain of a fixed return at whatever time he may 
die, but he can get less of this protection for the premium. 
Presumably uniform premiums throughout active service 
would be charged, though numerous variations from that are 
conceivable. Another possible policy varies the amount of 
the insurance to conform to the general needs of the family, 
more closely than does a uniform amount during the term 
of the policy. The amount would probably diminish gradu- 
ally after forty-five. In this way, for the same premium more 
protection is given in the period before forty-five, and less 
afterwards. 
The The life insurance benefit becomes of peculiar importance 

^ a | )Ied to the employees who have been forced to retire because of 
genuine disability. In all probability their expectation of life 
has been impaired. Frequently disability is the shadow of the 
end, and general dissatisfaction would arise if some provision 
were not made either for continuing the policy in force or for 
an equitable settlement. The disabled deserve a high sum if 
they surrender their policies, because if they do not surrender, 
the fund will be called upon, in the average case, for a full 
payment within a comparatively short time. Two possible 
courses suggest themselves; either that the premiums be so 
calculated that the employee need make no further payments 
toward his special insurance in event of disability, to continue 

258 



DEATH BENEFIT 

it in force for the full term ; or that they be so calculated that 
the face value of the policy may be paid either in the event 
of death or of total disability. The latter provision will, of 
course, increase the cost of the benefit and the danger of abuse 
through fraud; and if adequate provision is made under the 
disability branch of the system it may be unnecessary. Its 
merit is that it gives the disabled employee power to mobilize 
all his resources when he is permanently disabled. The pro- 
vision for carrying the insurance in force for its full term 
is, of course, the cheaper provision, for far more interest is 
earned, and it is more fully protected against abuse. Wher- 
ever special insurance is provided, one of these devices or a 
similar one should be adopted to safeguard the interests of 
the disabled employee in his life insurance. 

Summary 

In summarizing this chapter, it may be safely said that 
under a wholly contributory system the minimum benefit in 
the event of death from ordinary causes that will satisfy the 
natural demands of the employee is the return of all his own 
contributions to the fund with compound interest, less a de- 
duction to cover the cost of protection which he has already 
enjoyed and consumed under an insurance benefit, such as the 
disability benefit. Under a partially contributory system or 
a non-contributory system, the employee might be satisfied 
with less than the equivalent of the full return required under 
a wholly contributory scheme, but that may be regarded as 
doubtful. Special life insurance benefits are popular among 
many employees, because they offer safe insurance at low cost, 
and may be introduced by the government to please its em- 
ployees and to give stability to the fund by having it sell both 
annuities and insurance. The two chief problems in connec- 
tion with special benefits are to make them flexible enough 
to meet the real needs of the employees and to preserve equi- 
ties as between employees. To give flexibility the suggestion 
is made that compulsory life insurance be reduced to a min- 

259 



RETIREMENT OF PUBLIC EMPLOYEES 

lmum, and that voluntary insurance above the minimum be per- 
mitted. The merits of insurance for shorter terms than the 
span of life are marked because they permit an employee to 
carry more insurance at the time that he needs it most, for 
the same premium. Premiums on voluntary insurance should, 
it would seem, be borne entirely by the employee. The rights 
of employees retired because of disability in special benefits 
must be fully protected. 



CHAPTER IX 

A BENEFIT IN THE EVENT OF DEATH IN THE 
ACTIVE SERVICE, DEATH THE DIRECT RESULT 
OF THE ACTUAL PERFORMANCE OF DUTY 

The Interests of the Three Parties in the Benefit. The Conditions 
Upon Which Granted. The Amount of Benefit in Its Relation to 
Salary. Types to be Considered. The Discretionary Sum. The 
Sum Based on the Number and Class of Dependents. The Fixed 
Sum Regardless of Dependents. The Fixed Proportion of Salary. 
The Amount of the Benefit in Relation to Economic Need of Em- 
ployees. Benefit N on-Contributory. 

Deaths that are the direct result of the actual performance 
of duty are so different from ordinary deaths that they must 
be separately considered. The subject of such deaths will, 
however, be touched briefly and no attempt will be made to 
present an elaborate or exhaustive study of the principles in- 
volved in workmen's compensation laws. 

The Interests of the Three Parties in the Benefit 

The interests of the three parties to the system are manifestly The Gov- 
different if death is the direct result of the actual performance ernment 
of duty than if it results from what may be termed ordi- 
nary causes. The government, which has comparatively little 
interest in a benefit in event of death in the active service from 
ordinary causes, has a peculiar interest in event of death in 
the actual performance of duty. In certain branches of the 
public service, notably in the police force and in the fire de- 
partment of municipal governments and in the military and 
naval services of the state and federal governments, the em- 
ployees are called upon from time to time for instantaneous 
action involving great personal risk. To secure unhesitating 
service from men who are reasonably considerate of their 

261 



RETIREMENT OF PUBLIC EMPLOYEES 

responsibilities to their families, the government must give to 
employees of this type some assurance that if death results 
from their activities suitable provision will be made for their 
dependents. In certain other branches of the service the work 
is clearly dangerous, though it does not demand the same kind 
of courage that is required in meeting sudden emergencies. 
The railway mail clerk, for example, runs many of the risks 
of a railroad employee; and the health officer, who has to deal 
■first hand with cases of contagious disease, runs special risks 
inherent in the nature of his calling. In some cases the danger 
of the service may act as a deterrent to possible entrants and 
may prevent the proper type of men from applying unless 
they know that some provision has been made to compensate 
for the special dangers. The method of paying somewhat 
higher wages in the more dangerous callings will perhaps 
overcome the difficulties in certain cases, but it is an inadequate 
solution. The higher wages go to the man who escapes as 
well as to the man who is injured. The men can protect 
themselves with their higher wages only by purchasing pri- 
vate insurance, under which the man who escapes will help 
pay for the benefit to the dependents of the man who does not. 
Private voluntary insurance is, however, inadequate, because 
it is comparatively expensive and will not be generally pur- 
chased. The government will accordingly be met by the claim 
of the widow and children of the man who was not insured 
at all or who was inadequately insured. Such claims are so 
strong that in spite of the opposition to civil pension systems 
for public employees in this country, many cities have made 
provision for firemen and policemen. 
The The employees have the same general interests in this bene- 

Employees fa ^^ they have in a benefit in event of death from ordinary 
causes. They also naturally seek to get compensation for the 
added risks to which they are subjected by their work. An 
employee engaged in a calling recognized as dangerous finds 
it more difficult than the ordinary man to get his life insured 
in a private company and has to pay a higher premium to 

262 



DEATH BENEFIT IN THE ACTIVE SERVICE 

reimburse the insurance company for the extra risk it has to 
take in insuring him. His natural attitude will be that this 
added expense, being due to his work, should be borne by the 
employer. 

The general public also has the same general interests in the The Public 
benefit in event of death in the actual performance of duty 
that it has in the case of death from ordinary causes, but it 
also has other special interests. To an increasing degree the 
principle is being recognized that the economic losses arising 
from death in the actual performance of duty are part of the 
costs of that service in which they occur, and that these costs 
should be borne by those who derive the benefit from the serv- 
ice, as a part of its cost. In order properly to distribute the 
cost of deaths over all the consumers of that service so that 
each may bear his fair share, the principle of insurance may 
be resorted to, so that each payment by the taxpayers for serv- 
ices shall include the amount necessary to pay the average 
death claims which will arise as the direct result of that 
service. 

The interests of the public are, moreover, that these pay- 
ments shall be made promptly with a minimum expenditure 
of time and energy in litigation, and that the amount of 
allowance shall depend more on the extent of the damage 
done to the family of the employee than on the exact nature 
of the circumstances under which the employee met his death. 
The problem is not so much to determine to a nice degree 
the exact merit of the deceased employee and to measure dam- 
ages accordingly, with high payments in one case and little 
or no payments in another, but to have reasonable payments 
in all just cases awarded under a system that invokes min- 
imum costs of operation. 

If the government has established a system for dealing with Correlation 
industrial accidents and workingmen's compensation that is sy Stems 
working fairly and satisfactorily, the whole question of deaths Dealing 
due to the actual performance of duty may be provided for Private 
by bringing the government as an employer under the opera- Em P lo y ments 

263 



RETIREMENT OF PUBLIC EMPLOYEES 

tion of that law. In any event the laws governing private 
employers should be considered in developing the system for 
the government, because the government as an employer can- 
not consistently do less for its own employees than it requires 
private employers to do for theirs. 

The Conditions Upon Which Granted 

That death occurred in the actual performance of duty 
would seem to be the only condition to the granting of the 
benefit. Precautions against fraudulent claims are manifestly 
necessary. The device of assessing the full cost of the benefit 
against the next tax levy and requiring publication of the 
facts involved in making the award would probably operate 
strongly in this direction. 

The Amount of Benefit in Its Relation to Salary 

Types to Be Considered. In discussing the amount of ben- 
efit in its relation to salary or wages only two of the three 
familiar classes will be considered, ( i ) the amount entirely 
independent of salary and (2) the amount directly dependent 
on salary. The device of having the amount indirectly de- 
pendent on salary through the payment of a certain proportion 
of salary as a premium for insurance, or as a deposit to accu- 
mulate, is designed to promote equality of return among the 
employees, but in dealing with death in the actual perform- 
ance of duty the burden should not in theory be on the em- 
ployees and therefore there is no reason for attempting to 
preserve an equality of return. The burden belongs on the 
consumers of the service and they should pay what the service 
costs society in so far as that can be determined and admin- 
istered practically. Of the systems entirely independent of 
salary three deserve attention, (1) the discretionary system, 
(2) the system determining the amount by the number and 
character of the dependents and (3) the system granting a 
fixed sum or a fixed annuity. 

264 



DEATH BENEFIT IN THE ACTIVE SERVICE 

The Discretionary Sum. The discretionary system would 
have to be operated within maximum and minimum limita- 
tions ; a maximum to protect the taxpayers and a minimum to 
protect the dependents of the employee. The term dependents 
would, moreover, have to be very carefully defined. Even 
within careful limitations the danger of political manipulations 
might be great. As applied to a death benefit, moreover, a 
discretionary system apparently has no special or distinctive 
merit. For a disability benefit it may be urged by some on 
the ground that it will lessen the temptation to commit fraud ; 
but in dealing with a death benefit the problem of preventing 
fraud is different, — it is not to lessen the temptation to retire ; 
the employee is dead; the problem is to prevent the relatives 
from securing a benefit on the ground that the death was the 
direct result of the actual performance of duty, whereas in 
fact it was due to ordinary causes. Under such circumstances 
discretion can scarcely accomplish anything which cannot be 
accomplished better by less dangerous devices. 

The Sum Based on the Number and Class of Dependents. The 
The sum based on the number and the class of the employee's D p a ^' a a 
dependents apparently has distinctive merits as a benefit in the Basis of 
event of death in the actual performance of duty, because it 
partakes of the nature of damages paid for special injury 
done. All society is injured by the death of an employee in 
the actual performance of his duty, because his productive 
power is destroyed and the fruit of society's expenditures in 
raising him to a productive age is lost ; but society as a whole 
cannot be compensated. Any compensation will have to take 
the form of an allowance from the productive forces of so- 
ciety to certain individuals who are regarded as having suf- 
fered a peculiar injury which can be partially compensated 
by a money payment. Who the persons are who have been 
specially damaged can be determined in practical administra- 
tion either by the people as a whole, through their legislative 
body, or by the employee himself, or possibly by the employee 

265 



RETIREMENT OF PUBLIC EMPLOYEES 



Actual 
Dependency 
Criterion 
of Special 
Damage 



himself within certain limitations laid down by the legislative 
body. The employee may be permitted to decide, by a pro- 
vision requiring that payment be made to the personal repre- 
sentatives of all employees killed in the actual performance 
of duty to be distributed as the employee may by will have 
directed or in the absence of a will, as the law has directed. 
Such a device partakes as nearly, as may be, of the nature of 
punitive damages to be paid to the estate of the employee. 
The other device is for the legislature to recognize certain 
classes as specially damaged and to pay the damages to them 
direct. They take, not from the estate of the employee, 
but direct from the public because of damages done. The 
basis of a claim for special damage would obviously have to 
be that of special injury, and the only possible line for divid- 
ing special injury from general injury seems to be that of 
economic dependency. In the event of the death of an em- 
ployee without dependents, it is very doubtful whether a friend 
of the employee should be given a right to call on the pro- 
ductive power of society for damages to compensate him for 
the loss of his friend because he has not received a special 
monetary injury. 

Actual dependency would be tne natural criterion for such 
a benefit, but several questions arise as to the extent to which 
actual dependency shall be recognized. In case a widow sur- 
vives with one or more young children, she clearly requires a 
benefit to enable her to continue the service she has been ren- 
dering society in caring for those children. If there are no 
children and the widow is comparatively young, the question 
may be raised as to how far she has received a monetary dam- 
age. She has been deprived of the position in which she was 
earning her living, but her earning capacity has not been de- 
stroyed. If she has no further duties to perform in respect 
to the marriage, it may be argued with considerable weight 
that it is in the interests of society that she should seek gainful 
employment and that it is not in the interests of society that 
she should have the means granted her by law to live in idle- 



266 






DEATH BENEFIT IN THE ACTIVE SERVICE 

ness because through accident she has lost a position in which 
she might have rendered excellent service. Similarly, when 
a widow with children remarries, a question arises whether 
her own benefit should continue. In the case of children the 
question is how long a period of dependency shall be recog- 
nized. A retirement system for the highest grade servants, 
conspicuous for the lavishness of its benefits, granted an 
annuity to daughters of the employee until their marriage, 
regardless of their age. Such a provision would seem foreign 
to American philosophy. Here the ideal would seem to be 
to have all self-supporting after a reasonable, if not a gener- 
ous, period of tutelage. American public opinion would 
hardly countenance the creation by legislative action of an 
adult leisure class of normal individuals, even if the necessity 
for their becoming self-supporting may have had its origin in 
a service accident. It would probably regard a small cash 
payment at death as the maximum provision for a specially 
damaged active adult who had no further duties to perform 
in maintaining a home for dependent children. Dependent 
parents are sometimes provided for in the absence of widow 
or child. If the parents are actually dependent and are no 
longer capable of self-support, they would seem clearly en- 
titled to special damages. Brothers and sisters under the age 
of economic independence and actually dependent upon the 
employee would also seem entitled to consideration on the 
theory of special damages. Two conditions to a grant on this 
theory would appear to exist: (i) special damage and (2) Two 
membership of a class the continued economic dependence of 
which is at least not contrary to the general interests of so- 
ciety. 

Another important question to be considered in developing Family 
a benefit based on the number and type of dependents is versus 
whether the immediate family shall be the unit or whether Individual 
each individual in the family shall be a separate unit. In one 
case a given amount would be granted to each family coming 
within the adopted definition of a family regardless of its size. 

267 



RETIREMENT OF PUBLIC EMPLOYEES 






In the other a given amount would be provided for a child 
less widow, presumably a different amount would be allowed 
a widow with one or more children, because she would be 
expected to devote most of her time to maintaining the home. 
To her allowance a certain amount would be added for each 
child with a possible maximum limit to the amount that could 
be paid the family as a whole. Such a device is somewhat 
more complicated, but it better meets the complicated situa- 
tions that arise. 

The Fixed Sum Regardless of Dependents. The fixed sum 
independent of the employee's dependents would be allowed 
apparently on either one of two theories, that it is a sum like 
an ordinary life insurance benefit or it is a sum in the nature 
of liquidated damages paid to the employee's estate for injury 
done. It is of less general social utility than a sum determined 
by the number and type of the employee's dependents, because 
it would give similar allowances to the remote relations of a 
man with no immediate family and to the widow and children 
of a married man in early middle life. Provision might have 
to be made in fact to restrict the classes of dependents to 
which payments could be made. The fixed sum even then 
would have no relation to the extent of the need and to the 
number and types of the persons specially damaged. The 
childless widow would receive the same amount as the widow 
with a considerable family. It bears, moreover, no relation 
to what the employee has been earning. 

The Fixed Proportion of Salary. An annuity of a fixed 
proportion of the employee's salary has the merit of simplicity. 
Such a payment would naturally be made only to certain speci- 
fied beneficiaries, and would hardly be made to anyone who 
was not a dependent of the employee. Such a provision may 
be somewhat unfair to the younger men, because although 
their salaries are lower than those of the older men, they and 
their families have looked forward not only to the continued 

268 






DEATH BENEFIT IN THE ACTIVE SERVICE 

payment of the present salary, but to a reasonable advance- 
ment. In forces which are very homogeneous and in which 
the progress of the employee is determined by a definite scale, 
the inequity of paying more to the dependents of the older 
man than to the dependents of the younger is at its maximum. 
It would seem therefore that in a homogeneous service a fixed 
sum for each dependent of each class or for each family unit 
was the more desirable provision, but in services which are 
not homogeneous and have distinct classes of employees, some 
relationship to salary is required. This relationship could be 
established by paying a fixed proportion of salary in each case, 
or by dividing the employees into classes according to their 
salaries and occupations and paying fixed amounts for each 
dependent of each class or for each family unit. 

If the relationship between salary and the amount of benefit Payment 
in the event of death in the actual performance of duty is sinST 5 * " 
direct, and if the retirement system is being operated on the Premium 
actuarial reserve basis, it would seem especially wise to adopt 
the device of having all the costs of a service death benefit 
appropriated at one time in the form of a single premium by 
the session of the appropriating body that meets immediately 
after the necessary investigation has been completed. The 
adoption of such a device eliminates the special dangers that 
arise from the use of a salary scale, and preserves to a max- 
imum degree the solvency of the fund. A special provision 
might well be included, however, to require the retirement 
system to keep a separate account of the operation of this 
branch of its work, so that if any serious deviation from the 
expected results occur the treasury may be reimbursed for 
any overpayments or make good any underpayments. 

The Amount of the Benefit in Relation to Economic Need of 

Employees 

An annuity of the minimum of subsistence for all those The 

who were properly dependent on the employee whose death ^ 1 J 1 u ^" m 

occurred in the actual performance of duty, to be paid during sistence 

269 



RETIREMENT OF PUBLIC EMPLOYEES 

the whole period within which such dependency is in the best 
interest of society as a whole, would seem the minimum 
amount of benefit permissible in such cases. That amount 
ma)- be regarded by some persons as too generous since it 
assumes, roughly speaking, that the employee, if he had not 
lost his life from service causes, would have continued to pro- 
vide throughout that period, whereas, as a matter of fact, 
other natural causes might have operated to destroy his pro- 
ductive powers before the expiration of that period. In other 
words, such benefit ignores the chance that the employee might 
have died in the natural course of events within a short time, 
or might have otherwise lost his ability as a breadwinner. 
These chances may of course be determined mathematically 
and an average period arrived at as the point at which the 
chances of immediate cessation of breadwinning ability and 
the chances of long continued breadwinning ability balance. 
Such a computation depends at best on averages, and in arriv- 
ing at such averages many factors have to be omitted. Even 
if the employee had not been killed in the performance of his 
duty and had continued as a breadwinner to the exact average, 
no one can tell what he might have earned for his family ovei 
and above the minimum of subsistence or what provision hc- 
might have left them, and it is doubtful if the mathematician 
has any data on which to base such an average. It is possible, 
however, to determine fairly accurately what it will cost so- 
ciety to carry the family along until it has fulfilled its main 
work, until its children have become self-supporting members 
of the community and until its aged dependents are beyond 
further need. Whether the employee himself would have been 
able to furnish all this support to his family had he lived is 
problematical, but it is certain that whether he could have 
provided it or not, he has lost his chance to try and somebod] 
has to do it. The minimum of subsistence has to be forthcom- 
ing if the family is not to drop below the level of economic 
efficiency. In the public service it would seem that the gov- 
ernment should assume the entire burden. If any elements 

270 



DEATH BENEFIT IN THE ACTIVE SERVICE 

of charity are actually involved, it is a recognized function of 
many government organizations to administer relief in cases 
of need, and such a provision enables them to do it quietly 
and efficiently without much danger of pauperization. 

The argument may be advanced on the other hand that a 
mere minimum of subsistence is entirely inadequate and that 
the government should provide an amount which would allow 
those properly to be carried as dependents the necessaries for 
maintaining the standard of life to which they have been ac- 
customed. The difference between the two is perhaps of little 
importance in forces composed mainly of comparatively low- 
paid employees. If numerous more highly paid men are em- 
ployed and if the service has many different classes, recogni- 
tion of different standards of life becomes more important. In 
such services, division of the employees into classes according 
to occupations or salaries with different provisions for each 
class seems feasible and possibly desirable. 

Benefit Non-Contributory 

For psychological reasons contributions by the employees 
toward a benefit in event of death resulting from the actual 
performance of duty may be regarded as objectionable. Al- 
though ultimately general economic laws may place part or 
the whole of the burden on the employees themselves, to place 
it there by legislation may furnish a ground for opposition 
to the system, and for ill feeling. The general principle is 
that the cost of such a death is a cost of production, and should 
be borne by the consumer of the product, or, as is more ap- 
plicable to a government, 1 it is a legitimate cost of service and 

1 "Approaching the subject from this point of view makes clear 
and sharp the distinction between a straight pension and a retiring 
allowance for superannuated employees. The former should be con- 
ferred on civil employees engaged in hazardous occupations who 
suffer injury or death in the performance of duty. The entire ex- 
pense of allowances or annuities granted in such cases should be 
paid out of the public treasury. They should be regarded as part 
of the legitimate cost to the public of conducting a hazardous busi- 
ness. The ordinary civil employee is in a very different situation. 

271 



RETIREMENT OF PUBLIC EMPLOYEES 

should be borne by the consumer of the service. In order 
to shift it to the consumer, in so far as it may be possible to 
do so, it should be paid in the first instance by the employer. 
To get the good will and support of the employees, the ap- 
parent incidence of this benefit should be on the government 
as the employer. 

He should be paid a proper and adequate compensation for the serv- 
ices he performs and there would seem no valid reason why the 
government employees who have been in receipt of such compensa- 
tion should be erected into a special class to be supported in their 
old age at public expense. On the other hand, if the public employee 
is not paid a proper and adequate compensation for his services, any 
method which seeks to supply the deficiency of pensioning him when 
superannuated is unjust to the employee, economically wasteful, 
politically demoralizing and detrimental to the efficiency of the serv- 
ice." — Retirement Legislation in New York, New York Civil Service 
Reform Association. 



CHAPTER X 

A BENEFIT IN EVENT OF DEATH AFTER RETIRE- 
MENT 

The Nature of the Problem. Death After Superannuation Retire- 
ment. The Interest of the Parties. Optional Settlements. Objec- 
tions to Optional Benefits. Death After Disability Retirement from 
Ordinary Causes. Death After Disability Retirement, — Both Dis- 
ability and Death Due to Actual Performance of Duty. 

The Nature of the Problem 

Not infrequently an employee dies within a short time after Origin 
he has passed to the retired list and become the recipient of 
a superannuation or a disability benefit. Under a wholly con- 
tributory system, it is at once apparent that the amount he 
has received in benefits is not equal to the amount he had 
paid in as contributions, and a demand will arise that some- 
thing be done to remedy this apparent injustice. Under a par- 
tially contributory system and more especially, under a non- 
contributory system, the element of loss through early death 
will not be so immediately apparent; but ultimately the same 
general demand will arise for a return of the deferred pay. 

In discussing the questions involved in granting such a ben- Division 
efit, it will be convenient to divide the subject into three heads : ° u ject 
(i) death after superannuation retirement; (2) death after 
ordinary disability retirement; and (3) death after retirement 
because of disability resulting from the actual performance 
of duty. The persons who receive a benefit on resignation or 
dismissal ordinarily are given a lump sum, and thereafter have 
no further connection with the fund. If, however, the rules 
of the fund allow an employee to continue his membership 
or to receive his return of contributions only in the form of 
a superannuation benefit, the position of such an employee 

^73 



RETIREMENT OF PUBLIC EMPLOYEES 

after entering upon his retirement allowance is no different 
from that of the ordinary retired employee, and all may be 
considered under the three headings just mentioned. 

Death After Superannuation Retirement 

The Interest of the Parties. The benefit in event of death 
after superannuation retirement is clearly of interest to the 
government only in so far as it may promote general satis- 
faction in the force and prevent grievances. Among the em- 
ployees, the interest naturally varies according to the number 
and the type of the employee's dependents and their ages. The 
man without dependents prefers under ordinary circumstances 
the largest possible annuity during his life, while he has the 
capacity to enjoy it, and he cares very little for any payment 
to his estate. The man who has only his wife to provide for, 
that is the married man who is childless or whose children 
have all grown up would ordinarily prefer a smaller annuity 
to be paid so long as either he or his wife shall live. The man 
with children still dependent on him for support is of course 
anxious for something which will guarantee their main- 
tenance until they are economically independent, and if that 
is beyond his reach, he desires something for his life with a 
payment to them in case he dies in the near future. The 
interest of the public is that in the event of the early death 
of the retired employee, no dependents shall be left who will 
require assistance from public or private charity. 

The Settle- Optional Settlements. Manifestly these various interests and 
ments_ objects can be met only by providing optional methods of 

settlements, each of equal cost to the system, and of equal 
financial value to the employee. For the man with himself 
only to provide for, an annuity for the term of his life with 
no payment whatsoever from the superannuation fund in 
event of death, regardless of when death may occur, is the 
preferable benefit. For the man with himself and his wife 
to provide for, or for the woman employee with herself and 

274 



DEATH BENEFIT AFTER RETIREMENT 

one dependent to provide for, a last survivor annuity is the 
benefit ordinarily desired. For the man with children still 
dependent on him, it is more difficult to make provision, be- 
cause the sum available to deal with may be too small to meet 
the situation adequately. A possible device is the payment 
of an annuity to the employee for life with the provision that 
if he dies before a certain time his children shall be paid a 
certain amount; in other words, part of the accumulation is 
used to purchase term insurance on his life for the benefit 
of his children. The amount of this insurance may remain 
fixed for the whole term or may be made to diminish gradu- 
ally as the end of the term is approached. Possibly such an 
employee might be granted an annuity for his life with the 
provision that if he should die before his youngest child was 
eighteen the annuity should be continued to his family until 
such time as the child should have become eighteen. 

The amount of the benefit which can be secured through the Factors 
exercise of one of these options will depend mainly on the Amount^ 
number of beneficiaries and their ages. To pay an annuity Benefit 
to a man or his wife so long as either of them survive must 
of course cost more than to pay an annuity to the man alone. 
Paid to the man alone, it stops on his death, but paid to the 
man or his wife so long as either survives, it may be paid to 
the wife for several years after her husband's death. If the 
annuity is for the life of the man with payments guaranteed 
until the youngest child shall have reached eighteen, it will 
cost more than an annuity for the life of the man only, for if 
the man dies before the child is eighteen, payments must be 
continued until the child is eighteen. The man who retires 
early, as has been previously noted, cannot purchase as large 
an annuity for a given sum as a man who retires at a more 
advanced age ; the younger man under ordinary circumstances 
will require more annuity payments. If two men are of ex- 
actly the same age and have exactly the same accumulations 
and each selects a last survivor annuity for himself and wife, 
they will get identical annuities only in case the ages of the 

275 



RETIREMENT OF PUBLIC EMPLOYEES 

wives are the same; if one wife is older than the other, the 
couple containing the older wife will receive the larger an- 
nuity. If a life payment is selected with payments guaranteed 
until the youngest child reaches a certain age, say eighteen, 
the amount of the annuity, if fathers are of the same age, will 
turn on the age of the youngest child. The man with a very 
young child will receive less, of course, than the man whose 
youngest child is already nearly eighteen. These elementary 
conditions governing the amount of the annuity available must 
always be kept in mind in planning a system. Under an an- 
nuity scheme those who live to extreme age profit at the ex- 
pense of those who die. As this element of profit from early 
deaths is diminished, the amount of benefit must be diminished 
unless the contributions to the system are increased. 

Objections to Optional Benefits. The introduction of op- 
tional benefits to give the employees something in the nature 
of a benefit on early death after superannuation retirement is 
of course open to the objection that it increases cost. Costs 
are increased probably in three principal ways : ( I ) most em- 
ployees will select a last survivor annuity or a children's 
annuity and hence these forms will tend to become the stand- 
ards in determining what is reasonable, instead of the cheaper 
annuity on a single life; (2) administration costs will be in- 
creased because considerable additional actuarial work will 
be required in valuing the various optional benefits and be- 
cause the system will have to keep track of the widows, chil- 
dren and other relatives who may be made beneficiaries. (3) 
granting optional benefits will result in a selection against the 
system ; some employees and their relatives may even go so far 
as to be examined b) r physicians to determine their condition 
before making their election, and the general tendency will be 
for those with impaired lives to take survivorship annuities 
or children's annuities whereas those who are in excellent con- 
dition will take their chances in selecting the higher benefits. 

The soundness of these three arguments tending to show 

276 



DEATH BENEFIT AFTER RETIREMENT 

an increase in cost as the result of offering optional benefits 
can hardly be directly questioned, though it is difficult to say 
to what extent they would actually operate. It must be re- 
membered, however, that two of the reasons which the gov- 
ernment as an employer has in establishing a retirement sys- 
tem are to attract men to its service and to hold the men who 
in the absence of a retirement system resign to accept other 
positions, although they have proved highly successful in the 
work of the government. Some retirement system has to be 
adopted to provide for the elimination of the disabled and 
the superannuated. After that object has been secured, the 
question becomes, would new entrants be attracted more by 
a higher immediate wage and rigid low superannuation bene- 
fits or by a lower immediate wage and higher flexible benefits, 
and would the older employees be more firmly held by the 
one system or the other? The exact answer to these questions 
is difficult to give. The English experience tends to show that 
the immediate wage is the more important consideration in 
drawing men to the service and that benefits under the retire- 
ment system operate to hold them after they are in. The 
merits and defects of retirement systems, however, are not yet 
well known. It would seem that if the government adopted 
one that went far toward meeting the needs of all employees 
through flexible benefits, it might by judiciously advertising 
the merits of that system make it not only a powerful agency 
for retaining men in its service, but also for drawing good 
men to it. The attractiveness of a system that would give 
adequate all-round protection at cost has not yet been fully 
utilized. 

Death After Disability Retirement from Ordinary Causes 

Disability retirement is essentially different from superan- 
nuation retirement because the cost of it cannot possibly be 
paid for out of an individual's contributions in his own behalf 
if it occurs in the earliest ages, but must be provided for by 
an insurance device. It would seem, therefore, that if any 

277 



RETIREMENT OF PUBLIC EMPLOYEES 

benefit in event of death after disability not arising from the 
actual performance of duty is to be provided, it should take 
the form of life insurance applicable to all, so that the man 
who died in harness would be treated as favorably as the man 
whose death was preceded by disability retirement. The 
questions therefore have been sufficiently considered in the 
chapter dealing with a benefit in event of death in the active 
service. 

Death After Disability Retirement 
Both Disability and Death Due to Actual Performance of Duty 

If the death itself and the disability causing the retirement 
prior to death were both the direct result of the actual per- 
formance of duty the situation is of course very different from 
that arising where the death after disability retirement was 
due to ordinary causes not directly connected with the actual 
performance of duty. The obligations of the government as 
an employer are manifestly different, as also are the rights 
of the employee and the interests of the public, but although 
the two classes of cases are clear and distinct in theory, they 
are by no means clear and distinct in practice. Unfortunately 
the general tendency of human nature is to attribute all disa- 
bility to causes arising in the actual performance of duty if 
something is to be gained thereby. The methods for deter- 
mining the truth are very unsatisfactory in that broad band 
of border line cases which lie between the clear-cut service 
accident and the disease which could by no possibility have 
been caused by the actual performance of duty. If disability 
in performance of duty has been established within the re- 
quirements of the retirement system and the employee has 
received a benefit on that ground, it is very difficult to oppose 
the contention when death occurs that it was indirectly du< 
to the disability resulting from the actual performance of 
duty. It may easily and perhaps truthfully be contended that 
the service accident or disease that necessitates retirement 

278 



DEATH BENEFIT AFTER RETIREMENT 

weakened the employee's vitality and hence a disease not re- 
motely connected with the cause of the disability proved fatal, 
whereas if it had not been for the service accident or disease 
the deceased employee would have been able to resist it. The 
difficulty of determining the real facts as to the cause of death 
in any except the simplest cases is the principal obstacle in 
dealing with deaths after a disability retirement because of 
service accident or diseases. 

If the fact that the death was due to the actual performance 
of duty can be satisfactorily established, the proper procedure 
would seem to be to consider the case as if no period of dis- 
ability had intervened, especially if death occurred within a 
comparatively short time after retirement on disability, and 
to grant to the family of the employee the usual benefit paid 
in event of death in the active service from causes arising in 
the actual performance of duty. The period within which 
death must occur after disability retirement, if the employee's 
dependents are to receive the special death benefit, might con- 
ceivably be limited as one of the precautionary devices to safe- 
guard the system. The general discussion of the benefit in 
event of death in the active service is applicable to this subject. 



CHAPTER XI 



The 
Problem 



Solutions 
Attempted 



THE EMPLOYEE WHO BECOMES INEFFICIENT 
FROM CAUSES OTHER THAN ACCIDENT, DIS- 
EASE, OR OLD AGE 

In government service an administrative officer is occa- 
sionally troubled by an employee who is neither old nor ill 
and yet is not up to even a low minimum standard of effi- 
ciency. "Deadwood" such employees are sometimes called. In 
private business in a great majority of cases such employees 
would undoubtedly be dismissed with scant ceremony. In 
the public sendee they are not infrequently carried along from 
one administration to another, because no one takes the initia- 
tive in forcing their resignation and there is always the hope 
that some new device will stimulate them to reasonable activ- 
ity and accomplishment. To a certain extent they may be 
the product of the conditions of the public sendee itself. They 
may be men who have lost all ambition because they could see 
no chances of advancement ahead of them, or they may be 
the product of political interference in the administration of 
the office, — on the one hand the man who knows that he is safe 
so long as a certain politician retains power, and, on the other, 
the man who is unwilling to keep on trying because he believes 
that all the rewards go to the man with influence and he him- 
self has none. The cause of their inefficiency one may classify 
as moral. 

These employees, inefficient from moral causes, become a 
problem for persons concerned with retirement systems and 
their management, because administrative officers responsible 
for such employees are naturally desirous of getting rid of 
them and will seize upon the retirement system as a suitable 
agency. In the English civil service two covert devices were 

280 



THE INEFFICIENT EMPLOYEE 

adopted, retiring such employees as physically or mentally dis- 
abled on the certificate of the employee's physician, or reor- 
ganizing the office in which they were employed and eliminat- 
ing them on what were called "abolition terms," extra grants 
allowed on the ground that the work which they were able 
to do was no longer required by the government. The abuse 
of "abolition of office terms" in this way became so great 
that they were eliminated by the law of 1887, which gave the 
Treasury discretionary power to grant an allowance not to 
exceed the disability allowance "where a civil servant is re- 
moved from his office on the ground of his inability to dis- 
charge efficiently the duties of his office and a superannuation 
allowance cannot be lawfully granted to him." Special re- 
port had to be made to Parliament regarding all grants of this 
nature. 1 

Each of these devices is open to the general objections that Objections 
they are enormously expensive and put a premium on ineffi- to ° utlons 
ciency. If the disability benefit is to be large enough to be 
of real social utility in providing for the man who is physically 
or mentally disabled, society can scarcely afford to have it 
granted to men who are inefficient without excuse. Any sys- 
tem that gives the inefficient who withdraws any allowance 
over and above that granted to the efficient who resigns is 
open to the obvious objection that it encourages inefficiency 
on the part of anyone who is considering resignation. 

The return of all contributions, or their equivalent, for Return of 
benefits not yet received would seem to be the maximum grant ^ns" "" 
to inefficient employees on their retirement. Such an allow- 
ance might encourage the removal of inefficient employees, 
whereas if no allowance of any sort is paid, the inevitable 
tendency is to increase their hold upon their positions and to 
increase the temptation to slip them over to the disability re- 
tirement roll. 

1 See evidence before Royal Commission on Civil Establishments, 
especially First Report, p. 401, q. 10,164 (British Parliamentary 
Papers, 1887, Vol. XIX). 

28l 



RETIREMENT OF PUBLIC EMPLOYEES 

That a mere return of contributions will not result in the 
dismissal of all incompetents must be admitted, but the solu- 
tion of the problem of the inefficient from moral causes does 
not seem to be within the scope of a retirement system. A 
well-developed system may tend to reduce the number of such 
cases in the ways indicated in the discussion of the purposes 
sought in the establishment of such a system given in Chapter 
I, but to include a special benefit for the elimination of the 
inefficient without excuse seems thoroughly undesirable. The 
solution of this problem appears to be in devising an adequate 
method for separating the excusably inefficient from the in- 
excusably inefficient and submitting the latter to all the stimu- 
lating devices at the disposal of the administration. If these 
devices do no good, dismissal with a return of contributions 
appears to be the proper course. 



CHAPTER XII 

A BENEFIT IN THE EVENT OF THE ABOLITION OF 
POSITION OR REORGANIZATION OF OFFICE 

A risk run by the employee in certain branches of the serv- The 
ice is that the work which he has been doing may become no 
longer necessary to the government or that some improvement 
in organization, or some labor-saving device, may enable a 
smaller number of employees to do all that kind of work 
needed. The United States Pension Office a few years ago 
had to discharge a large number of employees because of the 
diminishing volume of the pension work and the reorganiza- 
tion of the office. The introduction of labor-saving devices 
in auditing has diminished the number of persons required 
for such work in some public offices. The assertion may be 
made that a special provision for such cases should be in- 
cluded in an adequate retirement system. The English Su- 
perannuation Act of 1859, as was mentioned in the preceding 
chapter, authorized the granting of a special benefit in event 
of abolition of positions or reorganization of office. 

Strong theoretical arguments can of course be introduced The 

in support of such provisions. On behalf of the government for 8 ^" 6 "* 

it may be urged that they facilitate the introduction of im- Special 
. .. , , , , . ,, Benefit 

provements in organization, methods and machinery, and they 

tend to prevent the continuance of an activity that is no longer 
really necessary. On the behalf of the employees it is urged 
that the special benefit compensates him for the loss of his 
position, which he had expected would be permanent and for 
loss of that capital which knowledge of the government work 
constituted. The government work is of course largely monop- 
olistic; skill, knowledge and training secured in the govern- 
ment service are not infrequently of comparatively little value 

283 



RETIREMENT OF PUBLIC EMPLOYEES 

in the commercial world, for commercial business is not done 
in the same way. Because the changes introduced by the gov- 
ernment have diminished the earning power of certain em- 
ployees, it may be argued the government owes these em- 
ployees some compensation. 1 On behalf of the public it may 
be urged that the cost of these special benefits will be more 
than saved to the public from the increased economies due to 
the reforms introduced. 
The The granting of special benefits proved objectionable in the 

Experience English civil service and under the present system no more 
is allowed than if the employee had retired because of ill 
health; and the disability allowance in the early years under 
the English system is comparatively small. The objections to 
the device were that it permitted able-bodied persons to be sup- 
ported at least in part from money derived from the taxpayer ; 

1 The case in favor of a special benefit in event of reorganization 
of office was clearly presented in a memorandum submitted by the 
employees of the Poor Law Commission of Ireland, published in the 
Report of the Commissioners on The Operation of the Superannua- 
tion Act, British Parliamentary Papers, 1867, Vol. XXIV, p. 13. 

"It is submitted that on the question of pension on abolition of 
office other considerations present themselves which appear to give 
a fair and just claim for a larger pension than if the party retire 
on superannuation. A man may, after serving for a considerable 
number of years on a small and insufficient salary, have only just 
entered on the enjoyment of one commensurate with his merits and 
services and which he looks upon as a requital for the deficiencies 
of former years, when new arrangements are made with a view to 
effect a saving in the public expenditure, his office abolished, and he 
thrown out of employment through no default of his. A man so 
circumstanced cannot, after having devoted the best years of his life 
— and these in which his mind is most capable of receiving new im- 
pressions — to the public service, hope to enter upon a new walk with 
a reasonable prospect of success. The business knowledge required 
in a government department is comparatively valueless in the outside 
world, and it is in vain for him to hope to struggle successfully 
against the host of well-trained and qualified competitors he will be 
certain to encounter in any other pursuit he may select ; and, there- 
fore, unless his services be transferred to some other department 
of the state as the terms on which he held his office at the moment 
of its abolition, it is submitted that a serious injury has been inflicted 
on him, in order that the public may be benefitted. It is, therefore, 
conceived that it is only just that the public should compensate him 
to an extent commensurate with the injury." 

284 



REORGANIZATION 

it resulted in reorganizations made to advance the interests of 
a particular clique or group dominating the office ; and it fur- 
nished a means of rewarding the inefficient by retiring him 
to leisure with more than he would have received had he been 
disabled. 2 The conditions of American public service would 

2 107. "We come now to a clause in the Superannuation Act (clause 
7) which has given rise to very great abuse. Under the provisions 
of this clause, a civil servant whose office is abolished, or who is 
compulsorily removed from the service in order to facilitate arrange- 
ments by which greater economy and efficiency may be secured, may 
receive a compensation allowance calculated on the same scale as if 
he were qualified for a pension, but with addition to his actual ser- 
vice of a number of years varying with the length of such service, as 
follows : 

Under 5 years' service addition of 1 year 

Above 5 and under 10 years ...addition of 3 years 
Above 10 and under 15 years ...addition of 5 years 
Above 15 and under 20 years ...addition of 7 years 
Above 20 addition of 10 years 

The intention of this clause was to facilitate arrangement by which 
greater 'economy and efficiency might be secured/ but in practice 
this result has not been always attained. 

The clause has been too often used to get rid of inefficient men 
who have, upon the plea of 'abolition of office' really received extra 
pensions for their inefficiency and as a means for securing a flow of 
promotion; and though it would not be correct to say that the public 
service has derived no benefit from the operation of the clause we 
believe that on the whole, it has worked unsatisfactorily, and that 
the power conferred by it has sometimes tended to laxity of disci- 
pline. The knowledge that it would be possible, by nominal reorgani- 
zation of office, to grant a pension to a clerk who failed to perform 
his duties satisfactorily has not improbably led in some instances 
to cases of indolence and inefficiency being lightly treated or alto- 
gether condoned which, had no such provision existed, the responsible 
officers would have felt it necessary to correct at the outset by 
admonition or stoppage of increment. Any large reorganization of 
an office or offices should in future be invariably carried out by means 
of an act of parliament or at least by provisional orders in council 
approved by parliament. The abolition of a single appointment is 
best effected by transferring the officer to another department, if 
possible, or by attaching other duties to him temporarily or by not 
filling the vacancy when by promotion or otherwise it occurs. 

Hi. And as regards the individual clerk, we must again urge that 
due attention must be paid to each man's work and progress and 
better securities taken in accordance with our suggestion that only 
fit men shall be kept in the service and only meritorious ones pro- 
moted and this being so, we believe that in the future at all events 

285 



RETIREMENT OF PUBLIC EMPLOYEES 

probably give rise to even greater abuse of such a provision 
and its inclusion in an American law would doubtless lead to 
wholesale reorganizations on changes of administration. 
Transfers The inclusion of such a benefit seems in fact unnecessary. 

If the employee is still young or reasonably young the govern- 
ment could provide for his transfer to some other position 
where his services can be utilized, and, as before mentioned, 
the retirement system should be so closely connected with the 
selecting and appointing agencies that it could place the em- 
ployees. 3 If the employee is of advanced age his rights under 

the exercise of such power will seldom be found necessary. It must 
be made plain by express notice to every member of the service, that 
without other demerit, he may be required to retire from it upon 
grounds of unfitness, receiving back the amount of his contribution 
toward pension, with compound interest therein, as suggested by us, 
but without any further sum. 

112. We fully recognize the difficulty of thus removing clerks who 
may have given some years of service to the government; but this 
difficulty is lessened in proportion as they are removed at an early 
stage of their service. Be the difficulty, however, what it may; it 
must be resolutely faced, as we feel convinced that it is indefensible 
to grant pensions in such cases. 

113. We recommend therefore the immediate repeal of this clause 
of the act of 1859." — Second Report Royal Commission on Civil Estab- 
lishments; British Parliamentary Papers, 1888, Vol. XXVII, pp. xxiv 
and xxv. 

3 Steps should be taken by the government to ascertain thoroughly 
the separate wants of the various departments, and fresh men in any 
case should only be brought into the service when the vacancies can- 
not be filled by redundant men within it. And as regards the future, 
more consistent and organized efforts should be made to effect trans- 
fers. In the earlier years of service experience of more than one 
department is of value on both sides. It should be made perfectly 
clear that all clerks entering the service are liable to be called upon 
to serve at any time in any office, and the difficulty which at present 
exists in carrying out such transfers will be greatly lessened when 
the regulations are made more uniform throughout the service, and 
the prospects and advantages of the various offices are more generally 
equalized, idem, p. xiii. 

The proposal for transfers is, however, not without its own diffi- 
culties. The attitude of government administrators in general is 
probably typical by the following testimony given before the Royal 
Commission on Civil Establishment (p. 336, q. 19,209). It would 
seem, however, that the inefficient clerk who is not disabled should not 
be eliminated through the establishment of a special benefit under 
the retirement system. 

286 



REORGANIZATION 

the retirement system should be such that he could be retired 
without great hardship. If the proposed reorganization or 
change is such that it will work peculiar injustices or will 
necessitate wholesale removals, it would seem as if the cases 
should be covered by special legislation, and if any special 
benefits are granted the present value of these awards should 
be appropriated by the special legislation, after they have been 
actuarially determined, and be paid to the retirement system 
for disbursement. 

Special benefits in event of reorganization of office and Actuarial 
abolition of position would be difficult to include in a sound 1 cu ties 
system operated on the actuarial reserve basis, because reor- 
ganizations and abolitions could hardly be assumed to occur 
at any regular rate. They are sporadic, and then vary widely 
in extent. To a marked degree, however, they would need 
that control which comes from measuring in advance the full 
cost of the proposal. In the English service the question 
sometimes rose whether the savings that had been effected 
through the reorganization were not more than offset by the 
cost of the retirement benefits that had to be paid prematurely. 
One of the great merits of the actuarial reserve system is that 

19,209 . . . "A transfer is a very good thing when an officer is 
called from one department on account of his special abilities and 
merits, to fill a vacancy in another department . . . But when one 
hears of these transfers it is mostly in connection with transfers of 
what are called redundant clerks in an office, people in an office from 
which work has been departing, and who then become redundant. 
There is no class of officer in the service for whom it is more difficult 
to find a place in another department than a redundant clerk. There 
is an essential difficulty in getting any good work out of such people, 
because the office from which they are taken naturally is very care- 
ful, if possible, to retain the best officers in its service that it can, and 
then such redundant clerks have probably got on a certain way in 
the service, and they look to be placed in as good a position in the 
department to which they go and that cannot very well be done with- 
out injuring the prospects of somebody in that department. The 
whole question of employing redundant clerks in this way seems to 
me almost quite hopeless and the heads of the different departments 
upon whom the responsibility for the administration very largely 
rests naturally discourage very much the idea of such transfers in 
any particular case where it occurs. We do not like it." 

287 



RETIREMENT OF PUBLIC EMPLOYEES 

it results in a weighing of the cost, but it would hardly be 
applicable in providing for reorganization benefits. 
Conclusion The general conclusion to be drawn therefore is apparently 

Stfeciaf against attempting to weave a special benefit in event of aboli- 

Benefits tion of office or reorganization into the complex net work of 

the system. The employee would receive, of course, the ordi- 
nary benefits granted on withdrawal, and if more seems de- 
sirable it could better be provided by special legislation and 
special appropriation with all the facts in view than by at- 
tempting to cover the almost infinite variety of possible cases 
by general legislation. 



CHAPTER XIII 

THE PRESENT EMPLOYEES 

Scope of the Chapter. Differences Between Present Employees and 
Future Entrants. Differences in Homogeneity. Differences in 
Economic Relation to Retirement Systems. Differences in Period 
of Social Evolution. Differences in Desires for Benefits. Differ- 
ences in Ability to Provide Benefits. Differences in Susceptibility 
to Moral Injury. Division of Present Employees. The Present 
Employees Who Will be Retired Upon Adoption of the System. 
The Contingencies to be Covered. The Superannuation Benefit, — 
the Cost of the Benefit. Division of Cost. The Conditions Upon 
Which Granted. Amount of Benefit. Employees Continued After 
Adoption of System, — Benefits for Past Services. The Contingen- 
cies to be Covered. The Superannuation Benefit, — The Cost of the 
Benefit. The Division of the Cost. The Conditions Upon Which 
Granted. The Amount of the Benefit. The Disability Benefit. 
The Cost of the Benefit. The Conditions Upon Which Granted. 
The Amount of the Disability Benefit. Employees Continued After 
Adoption of System, — Benefits for Future Services. The Con- 
tingencies to be Covered. The Superannuation Benefit, — The 
Cost of the Benefit and Its Distribution. The Conditions Upon 
Which Granted and Amount of the Benefit. The Disability Benefit. 
The Benefit in Event of Withdrawal. The Benefit in Event of 
Death. Summary of Important Points. 

Scope of the Chapter. The problem of devising a retire- 
ment system for present employees is in many ways entirely 
distinct from that of planning one for future entrants. The 
preceding chapters of this book have dealt almost entirely 
with future entrants as they are the more important class in 
considering the permanent retirement provisions. The object 
of the present chapter is to present the more important differ- 
ences between the two classes of employees and to discuss the 
effect of these differences in varying the principles that have 
been found to apply in the case of future entrants. 

289 



RETIREMENT OF PUBLIC EMPLOYEES 

Differences Between Present Employees and Future Entrants 

The The principal differences between the present employees and 

Enumerated t_le * uture entrants arise from differences ( i ) in their homo- 
geneity, (2) in their economic relations to the retirement sys- 
tem, (3) in their period in social evolution, (4) in their de- 
sires for certain of the retirement benefits, (5) in their ability 
to provide or to assist in providing their own benefits, and 
(6) in their susceptibility to moral injury through the estab- 
lishment of retirement systems. 

Differences in Homogeneity. If the new entrants to any 
given branch of the service should be assembled each year 
they would obviously be a strikingly homogeneous class. 
They would have the common characteristic that they were 
new entrants that year w T ith all that the fact implies. Though 
a few would doubtless vary rather widely from the average 
for the group, yet it would not be very difficult to describe 
a typical new entrant who would represent fairly accurately 
the class as a whole. The present employees cannot well be 
represented by a single individual as a type, because instead 
of being one class of entrants they are the survivors of all 
the different classes that have entered in the past fifty years 
or more, if the service has been established that long. In 
age they vary from the dean of the staff to the youngest 
junior; in sendee, from the old employee who entered as a 
boy to the employee the ink on whose appointment papers 
is scarcely dry* ; and in salary, from the lowest paid new entrant 
to the highest paid man in the service. Their economic and 
social position is no less varied. At one extreme is the 
patriarch who is being photographed as the great-grandfather 
in the four generations pictures and at the other is the young 
single man who has no idea of marrying. Among the women 
employees are at one extreme the elderly spinsters and the 
elderly widows and at the other the young things that one 
feels reasonably certain will not remain in the service for more 

290 



THE PRESENT EMPLOYEES 

than a year or two. Clearly one can devise a system for the 
homogeneous class of new entrants with a feeling of certainty 
and definiteness which is entirely lacking when one attempts 
to deal with the heterogeneous class of present employees. 

Differences in Economic Relation to Retirement Systems. 
The future entrants, as has been pointed out, regard the bene- 
fits under the retirement system as part of their compensation 
for services rendered; and the consensus of opinion among 
economists who have given thought to the subject appears to 
be that they are right in so regarding it, for irrespective of 
who pays the costs in the first instance fundamental economic 
forces over which the legislature has little or no control tend 
to place the ultimate incidence on the employees. The question 
of the economic nature of the retirement system for present 
employees cannot be so simply dealt with, because the em- 
ployees are heterogeneous in respect to age and length of serv- 
ice. Consideration of the question can perhaps be simplified 
by recognizing two classes of service, namely (i) service ren- 
dered prior to the establishment of the retirement system, and 
(2) service rendered after its establishment; and by dividing 
the present employees into two classes, (1) those who will 
be retired immediately upon the adoption of the retirement 
system, and (2) those who will have to serve after the system 
has been established before they become eligible to retire. 

The popular conceptions of retirement benefits as rewards Employees 
for meritorious conduct, as charitable grants, or as pernicious U p n C 
illustrations of the special privileges enjoyed by government Adoption 

1 1 .,....?,-,. . ,. , of System 

employees, have had their origin in the fact that in establish- 
ing retirement systems attention has generally been focused 
on the grants made to employees retired upon the initiation 
of the system in respect to services rendered prior to its crea- 
tion. The aged employees themselves have generally appealed 
to the government to deal with them benevolently on the 
ground of their long service, their need, or the insufficiency 
of the compensation paid to them under the terms of their 

291 



RETIREMENT OF PUBLIC EMPLOYEES 

contract of employment; and in many retirement systems the 
grants to the employees retired soon after the creation of the 
system have been benevolent grants pure and simple. In fact, 
it may be laid down as a general conclusion that the grants 
to the employees who retire soon after the creation of the 
retirement system are benevolent grants, unless the system 
forces retirements, for example, by establishing a compulsory 
retirement age. 

If the system forces retirements, the argument may be ad- 
vanced that the payments made to the employees compelled 
to retire are in the nature of liquidated damages to com- 
pensate them for the changes made in the conditions of their 
employment. When they entered the service the general rule 
was, in all probability, that an employee would not be dis- 
missed so long as he could fulfill minimum attendance re- 
quirements. The establishment of a compulsory retirement 
age changes this rule and provides systematically for the elim- 
ination of those of advanced age. A system with a com- 
pulsory age takes from a few the privilege of remaining on 
the active roll at full pay until advanced age, and as com- 
pensation, it may be argued, it pays a smaller amount for life 
to all who leave as superannuated, although some of them, 
in the absence of a retirement system, would have had to 
retire anyway and would have had nothing. It substitutes 
insurance for chance, and it may be said that the employees 
surrender their chance of long continuance on the active rolls 
in exchange for the insurance. 

The merits of this argument can hardly be considered in 
a general discussion, because they would seem to turn on 
the facts in a particular case. If a low compulsory age were 
established in a service in which employees had formerly been 
universally retained as long as they could show color of at- 
tendance, it might have considerable weight, whereas if a 
high compulsory age were fixed so that few were actually 
driven out and most who left did so because they preferred 
to go, it would be almost entirely academic. To present the 

292 



THE PRESENT EMPLOYEES 

argument has, however, seemed worth while, as it is the ex- 
ception to the rule that benefits for past services to employees 
retired on the inception of the system are benevolent grants. 

In trying to determine the economic nature of benefits for Benefits 
past services paid to employees who remain on the active rolls Services of 
for a considerable period after the establishment of the sys- Employees 
tern, another point has to be considered. Retirement systems 
generally provide that benefits in respect to past services shall 
be paid only on disability or on superannuation retirement, 
and that the employee shall forfeit all right to them in event 
of resignation. The value of these benefits for past services 
may be a considerable sum and may become a sort of economic 
anchor to keep an employee from drifting out of the service. 
In so far as it so operates it is compensation to the employee 
for continuous service. It is another factor tending to in- 
crease that economic inertia and possibly that economic igno- 
rance which not infrequently keeps an employee in a position 
in which his salary is not the full equivalent of his earning 
capacity. 

Benefits in respect to past services are therefore very diffi- 
cult to classify economically, but although in certain instances 
the employee may have some ground for claiming them as 
a right, they undoubtedly have in them some of the elements 
of a gratuity. 

Benefits in respect to the future services of present em- Benefits 

ployees tend to become part of the compensation for services services^f 

rendered and economic forces operate gradually to place the Employees 

r • • r i i ^ l Retained 

cost on the employees, whatever the provision of the law estab- 
lishing the system. If the government gives a straight pen- 
sion entirely at its own expense, its action is equivalent to rais- 
ing the scale of wages. At the moment this new scale is 
adopted, the incidence of the cost is directly on the taxpayers; 
they pay more today than they did yesterday for the same 
service; but no sooner does the system go into effect than 
the incidence begins to shift. That the straight pension will 
retain men in the service who would otherwise resign is one 

293 



RETIREMENT OF PUBLIC EMPLOYEES 

of the reasons for adopting it. In such cases the employee's 
consideration for remaining in the service is aggregate com- 
pensation, that is, immediate wage plus promised pension. 
Had not that employee been induced to remain by the pension, 
his resignation would have caused either a vacancy and a new 
appointment or one or more promotions and a new appoint- 
ment. The men who might have been promoted have their 
free pensions, but they have not the salary which they would 
have received had there been no free pension, and some of 
the cost of retirement benefits has thus been shifted to them. 
The forces at work are complex in the extreme, but it would 
appear to be safe to draw the general conclusion that the mo- 
ment retirement benefits become inducements for employees 
to remain in the service or for candidates to compete for posi- 
tions in it, they tend to become part of the compensation. 

Differences in Period of Social Evolution. The adoption 
of a retirement system may be regarded, to a certain extent, 
as a turning point in social evolution. Prior to the adoption 
of the system, the highly individualistic policy has been fol- 
lowed of paying an employee for his services solely in imme- 
diate wage and permitting him to manage his affairs for him- 
self. The establishment of a retirement system marks the 
acceptance of the policy of paying partly in immediate wages 
and partly in retirement benefits. Whether the system be con- 
tributory or non-contributory, it is, in many respects, virtually 
a compulsory savings institution that requires that the sav- 
ings be applied in a particular way. The future entrant, of 
course, will render all his services under this social regime, 
and can without difficulty adjust his personal affairs to dove- 
tail into the provisions of the retirement system. The present 
employees, on the other hand, began their services under the 
highly individualistic regime, and their affairs are arranged 
on that basis. In dealing with new entrants it may be assumed 
that the field is clear and that no conflicts can arise, whereas 
with present employees no such assumption is permissible; 

294 



THE PRESENT EMPLOYEES 

and, in fact, investigation would doubtless show that most 
present employees have already made some attempt to meet 
those contingencies of life against which the retirement system 
is designed to protect them. Two of the commonest devices investments 
used would probably be found to be the purchase of a house Enf'kTees 
on the installment plan, and the purchase of life insurance, 
frequently with an investment feature attached. Investments 
of this type have not infrequently been preferred for the rea- 
son that they involve an element of self-compulsion; they re- 
quire regular payments under penalty of a loss. The fact that 
such provision has already been made in numerous cases 
should be kept in view constantly in planning for present em- 
ployees. It again indicates the necessity for treating the pres- 
ent employees and the future entrants as separate classes, and 
for regarding the system for present employees as a tem- 
porary device designed to furnish a smooth transition from 
a highly individualistic policy to the less individualistic one of 
compulsory saving. 

Differences in Desires for Benefits. The individual future 
entrants, forming a homogeneous class with the future be- 
fore them, to be lived under the compulsory savings regime 
of the retirement system, naturally desire practically the same 
benefits from the system. The individual present employees, 
forming a heterogeneous class, with all different proportions 
of their service lived under the individualistic regime, natu- 
rally desire very different benefits from the system. The 
present employee who is already of the age to be retired thinks 
only of the superannuation benefit, with possibly some pro- 
vision for his wife should he die before she does or for his 
young child if he happens to be one of those numerically ex- 
ceptional men who have young children at the time they reach 
the retirement age. Since such an employee has passed the 
age at which the question of being tied to the service is a 
matter of any consequence, he attaches little or no importance 
to a benefit in event of resignation ; and as he has escaped dis- 

295 



RETIREMENT OF PUBLIC EMPLOYEES 

missal he thinks a benefit on that contingency of no conse- 
quence. He is not at all beset by the fear of early death or 
of early disability. All that he needs, and consequently all 
that anybody needs, is suitable provision for himself and his 
dependents in his old age. As one passes down from the 
oldest present employee to the youngest one encounters a 
gradual change in view among those who have given thought 
to the subject of retirement benefits; and the youngest present 
employee will be like the new entrant in preferring reasonable 
protection against all the more important dangers of life to 
larger protection against superannuation and disability at the 
expense of no protection against death and dismissal and a 
forfeiture in event of resignation. 

Differences in Ability to Provide Benefits. In considering 
the differences between the present employees and the future 
entrants in respect to their ability to provide their own super- 
annuation allowances, it is important to distinguish clearly 
between the annual contributions or annual premiums which 
have to be paid toward accumulating the real cost of benefits 
and the real cost itself. The real cost of a superannuation 
allowance, for example, may be defined as that amount of 
money which must be in the superannuation fund in respect 
to each employee retired, at the moment of retirement, to per- 
mit the fund to pay the promised benefits in all cases. An 
actuary would define it, possibly, as the present value of an 
annuity of the amount of the superannuation allowance with 
first payment immediately. The contributions or premiums 
are those amounts which paid annually, or at other stated 
intervals, will, with compound interest, accumulate the real 
cost by the time the employee retires. The essential point is 
that the real cost of a superannuation annuity of a fixed 
amount with first payment at a fixed age is exactly the same, 
however long an employee may have been in the service. 

The amount of contribution or premium which the em- 
ployee, or the government in his behalf, will have to con- 

296 



THE PRESENT EMPLOYEES 

tribute to accumulate the cost of an annuity of a fixed amount High 
with first payment at a fixed age will turn, therefore, entirely ^Benefits 
on how long a time is to elapse between the date of the first for Aged 
contribution payment and the date- of the retirement. If this 
period is long, the contributions will be comparatively small, 
for two reasons : ( i ) The number of installments paid will 
be high, and (2) the aggregate amount of interest earned 
will be large, because the early payments will have been at 
interest a sufficient time to increase perhaps five or six fold. 
One dollar paid in the first year of service will, because of 
interest, purchase as much superannuation benefit as four dol- 
lars paid about thirty-five years later, if the fund is operating 
on a four per cent basis on a savings bank plan. If the period 
between the first payment and the date of retirement is short, 
the rates of premium become prohibitive because the cost will 
have to be distributed over a small number of payments and 
none of these payments will have been on deposit a sufficient 
time to earn any considerable amount of interest. 

All present employees, with the possible exception of the 
very recent appointees, are therefore in an entirely different 
position from future entrants in respect to their ability to bear 
the cost of their own retirement. In the extreme case of the old 
present employee who is to be retired immediately upon the 
adoption of the system, the premium would be the entire real 
cost, several thousand dollars for an annuity of a few hundred. 

Even if time were not against the present employees, it inability 
may be questioned whether socially and economically they are E^p 1 "" 6 "^ 
as well able as future entrants to pay even that contribution to Pay 
which would have been assessed against them had the system prf m iums 
been in force when they joined the service. New entrants 
generally enter the service because the net salary, that is, the 
salary less any contributions to the system, is greater or has 
greater purchasing power than the remuneration of their 
former positions. In their opinion the position is the best 
they can get and they accept the retirement contribution more 
or less as a matter of course. Present employees have been 

297 



RETIREMENT OF PUBLIC EMPLOYEES 

drawing their salaries free from any premium deductions and 
they have either permitted their standard of living or cus- 
tomary mode of life to come up to their salary or they have 
saved something. It is often said, more or less offhand, in 
discussing retirement legislation that to compel the present 
employee who is now spending all he earns to make provision 
for the future is a good thing. The fact indeed creates a 
presumption of thriftlessness, but the presumption is not con- 
clusive. In some instances an employee has many dependent 
upon him and he is using his money, occasionally with almost 
extraordinary skill, in caring for them and in giving them an 
education. To him a demand for a premium means curtailing 
the advantages he is giving to his dependents. Anyone who 
has been close to the force of a large government office can 
generally recall cases in which employees have carried heavy 
burdens because of illness in their families, not only spending 
all they earned, but going into debt in addition. These per- 
sons win the respect and admiration of their fellow employees; 
and a quick assumption that a forced contribution would bene- 
fit them rouses opposition to the system. 

If the employee has been saving it is frequently assumed 
that to change the character of his investments is a simple 
matter and it will be no hardship to him to require him to 
put his savings into the fund. But investments cannot always 
be changed without loss. Investigation would probably show 
that two of the commonest types of investments for govern- 
ment employees are life insurance with investment features 
and the purchase of a house on the installment plan. Not in- 
frequently the surrender of an insurance policy involves loss, 
and real estate investments are notoriously inflexible. 1 

1 "One reason is given by teachers for preferring insurance to any 
other form of investment, and this reason has much to do with the 
fact that teachers have invested their savings to such a large extent 
in insurance. Many teachers write that they have taken out endow- 
ment policies for the reason that this involves an obligation for a 
regularly recurring payment either annually or semi-annually. The 
teacher thus places himself under an obligation which he cannot well 

298 



THE PRESENT EMPLOYEES 

A statement of the amount of premiums or of contribu- 
tions which the present employees will be called upon to pay 
in terms of a percentage of their salaries gives a mistaken idea 
of its importance to the employee. A contribution of only 5 
per cent sounds small, but in the case of the man who has 
been saving 20 per cent of his salary it necessitates a reduc- 
tion of over 6 per cent in his regular expenses or of 25 per 
cent in his payments on or toward investments. In the case 
of a man who has been saving only 10 per cent of his salary, 
it involves a reduction of 50 per cent in his annual payments 
on or toward investments unless he can curtail his expendi- 
tures. To get the true mental attitude of the present em- 
ployees, standard of living must be thought of in terms of 
food, clothing for the family, and education for the children ; 
and investments, in the terms of payments on the insurance 
policies and payments on the house. Not unnaturally many 
present employees find it difficult to see merit in a contributory 
system. 2 

Differences in Susceptibility to Moral Injury. The differ- 
ence in the moral effect of a free pension on an older employee 
who has already nearly completed his service and the young 

avoid. Without this definite fixed obligation a large proportion of 
teachers find that they would make no saving from income whatever. 
It seems clear from the tenor of many of these letters that the use of 
insurance as an investment, and particularly the preference for en- 
dowment insurance, is in no small measure due to the fact that this 
form of investment provides a means by which the teacher is not 
called upon for a large payment at one time, but under which he 
accepts an arrangement which compels him at regularly recurring 
intervals to set aside a part of his income which otherwise would not 
be saved at all." — "A Comprehensive Plan of Insurance and Annui- 
ties for College Teachers," by Henry S. Pritchett, Bulletin 9, Car- 
negie Foundation for the Advancement of Teaching, New York, 1916, 

P- 37- 

2 "To provide the entire fund (for past services) from assessments 
is so manifestly improper that it merits no consideration. To pro- 
vide any part of it from such assessments is only in a less degree 
objectionable." — "Retirement Funds for Government Employees," by 
Roland P. Falkner, National Civic Federation, Annual Meeting, New 
York, 1909, Meeting 9, 1908, p. 189. 

299 



RETIREMENT OF PUBLIC EMPLOYEES 



The 

Groups 
Dis- 
tinguished 



man just entering is manifest. One has lived his life free from 
the pension influence and comes upon the pension grant unex- 
pectedly toward the end of life. The younger man receives 
the promise of retirement benefits at the outset of his career 
and he may permit the certainty thus assured him to purchase 
from him his freedom for development. He may cling to the 
position that promises him security long after it has ceased 
to give him anything besides salary and security. 3 

Division of Present Employees 

Consideration of these differences establishes clearly at the 
outset that little progress can be made by thinking of present 
employees as constituting a homogeneous group. They must 
be subdivided into (a) those who will be retired immediately 
upon the adoption of the system, and (b) those who will be 
retained on the active rolls after its adoption ; and the services 
of the second group can at times very conveniently be divided 
into (i) that rendered before the system was created, and 
(2) that rendered subsequently. In discussing the principles 
that apply in devising a retirement system for present em- 

3 "At the inauguration of the Foundation the attention of the trus- 
tees and of the Founder was focused upon the aged teacher. His 
service and his need called for some humane and just method of 
dealing with the teacher whose usefulness had decreased by reason 
of old age. All the provisions of the pension rules as determined by 
the trustees looked toward the problem of the wornout or aged 
teacher and his dependents. Under these circumstances the effect 
that the establishment of a definite system of free pensions might have 
upon younger men was but little considered. No harm is done when 
through private philanthropy or by means of a college endowment the 
old, infirm teacher is provided with a competence during his declining 
years. It is, however, not so clear what the effect will be upon the 
man of twenty-five or thirty or thirty-five in holding out to him this 
expectation throughout his teaching career. To such a man the 
protection of a pension system as at present inaugurated is postponed 
to the distant future. The majority of these younger men will never 
enter into the possession of a pension, but the promise of it during 
thirty or forty years of their academic life will affect their relations 
in ways not so evident ten years ago." — "A Comprehensive Plan of 
Insurance and Annuities for College Teachers," by Henry S. 
Pritchett, Bulletin 9 of the Carnegie Foundation for the Advance- 
ment of Teaching, New York, 1916, p. 3. 

300 



of Dis- 
cussion 



THE PRESENT EMPLOYEES 

ployees, it may perhaps help to make three distinct sections, 
the first concerning present employees already of the age to 
be retired; the second, the past services of present employees 
who will be retained on the active rolls after the establishment 
of the system; and the third, the future services of present 
employees, although in many retirement systems in existence 
no such distinctions have been recognized, and those between 
the second and third division are not infrequently almost 
purely academic. 

In each of these three sections the first question to be con- TheOrder 
sidered is what contingencies shall be recognized as entitling 
to benefit. Each contingency to be provided for can then be 
separately discussed in so far as they demand any special con- 
sideration. In dealing with benefits for present employees 
the matter of cost and its distribution assumes a dominating 
position, and affects the conclusions to be reached on prac- 
tically all other points, and hence under each benefit it is de- 
sirable to consider cost and contributions first before taking 
up the conditions upon which the benefits are to be granted, 
and the amount of the benefits, under which heading may be 
included the three familiar divisions (a) in relation to salary, 
(b) in relation to length of service, and (c) in relation to 
economic need. 

Death and disability due to the actual performance of duty, 
it should be noted, are not mentioned in the following pages 
of the chapter, because it is assumed that whatever provisions 
are made in respect to benefits on these contingencies will be 
extended to all employees regardless of the time of their ap- 
pointment and hence the discussion of these benefits presented 
in reference to future entrants is applicable to present em- 
ployees. 

The Present Employees Who Will Be Retired Upon the 
Adoption of the System 

The Contingencies to Be Covered. The present employees 
who are already of the age to be retired are interested in two 

301 



RETIREMENT OF PUBLIC EMPLOYEES 

benefits only, (i) a superannuation allowance, and (2) a ben- 
efit in event of death soon after retirement. The superannua- 
tion benefit is, of course, the corner stone of the retirement 
system, and such a benefit must necessarily be granted if a 
system is established. 

Since the present aged employees cannot pay the cost of 
their own retirement allowances, their benefits, as has been 
seen, partake of the nature of gratuities and such payments by 
the State are justified only in so far as the benefits are liqui- 
dated damages for removal from office, or payments for the 
purchase of a service-improving device. Neither of these 
grounds would seem to warrant the payment of a special life 
insurance benefit in event of death after retirement. The 
furthest which the government would be justified in going 
would be to have its actuary calculate the present value of the 
employee's superannuation allowance at the time he is retired, 
and permit him to elect whether he will expend this sum (1) 
for a life annuity, terminating when he dies, or (2) for a last 
survivor annuity on his own life, and that of some dependent, 
or (3) for an annuity on his own life with a certain number 
of payments guaranteed. The expense to the State would 
be the same, and the option would permit of the application 
of the State's payment in the manner believed by the employee 
best to meet his own needs and those of his family. Such a 
device makes the system more flexible and thus has much to 
commend it. In so far as possible a transitional system should 
permit the employee to adjust the benefits to meet the situa- 
tion in which he finds himself. 

The Superannuation Benefit — The Cost of the Benefit. The 
real cost of a superannuation benefit, as has been said, is the 
present value of an annuity of the amount of the benefit at 
the age of retirement with first payment practically imme- 
diately. In the case of the male New York school teachers, 
for example, the cost of a superannuation allowance begin- 
ning at age seventy of one dollar a year is $6.76, and thus a 

302 



THE PRESENT EMPLOYEES 

pension of $600 would cost $4,056 ($6.76 X 600) ; for fe- 
male teachers the corresponding annuity value is $8.04, and 
a pension of $600 would cost $4,824.* These are the sums 
which would have to be in hand at the time the employees are 
retired in order to meet the claims as they fall due. It is 
assumed by the actuaries that the balance not yet required 
for paying- claims is constantly at interest, and that the in- 
terest thus earned will help to carry the load. If no fund is 
established, and the claims are met as they fall due, the cost 
will be somewhat higher. 

Division of Cost. The fact that a modest superannuation 
benefit with first payment at as late an age as seventy will cost 
several thousand dollars demonstrates very clearly the im- 
practicability of calling upon the present aged employees to 
bear any considerable proportion of the cost. If it could be 
assumed that they had the required funds it would be unneces- 
sary to establish a retirement system at all; the government 
could confine itself to selling annuities or it could arrange with 
private companies to sell annuities. It may be accepted as a 
well-recognized principle of retirement legislation that the 
entire burden of retiring present employees at or above the 
retirement age on the adoption of the system must be borne 
by the public. 

The Conditions upon Which Granted. In the discussion 
of the system for future entrants the point has repeatedly been 
made that a difference in the age at which retirement takes 
place makes a substantial difference in the cost of the system 
to the government, because the cost of the individual annuities 
diminishes as age advances, as also does the number who will 
receive those annuities. One obvious procedure on installing 
a new system is to place the retirement ages at the outset at 
a very high point. In the section on the benefits to present 

4 Report on the Pension Funds of the City of New York, Part II, 
by George B. Buck, New York (1916), p. 112. 

303 



RETIREMENT OF PUBLIC EMPLOYEES 

employees for past services will be considered the question of 
progressively reducing the age conditions so that the ideal age 
desired for future entrants will not be enforced at the outset, 
but will be reached a considerable number of years after the 
installation of the system. 

The danger of placing the ages at a high point is of course 
that some employees whose capacity is seriously impaired will 
be continued in the active service. This danger can be over- 
come through the provision of disability benefits, to be dis- 
cussed in the next section, or through the inclusion of a pro- 
vision that would permit the government to retire an employee 
if it so desired at an earlier age than those at which the em- 
ployee is given the right to elect to retire. As applied to future 
entrants such a provision is apparently not desirable, but it 
does not appear to be objectionable as a temporary measure 
applicable to present employees. 

In Relation Amount of Benefit. In planning a retirement system for 
to a ary future entrants, it will be recalled, the relationship between 
the amount of the superannuation benefit and the amount of 
salary raises that technically complex question whether in a 
service having a wide range of salaries the superannuation 
benefit should be related to salary, directly or indirectly. In 
the case of present employees already of the age to be retired, 
let it be said at the outset, the problem is one of technical sim- 
plicity. Since all the facts regarding past salary movements 
can be determined exactly, if the data have been preserved, it 
is entirely unnecessary to base any calculations on forecasts 
of the future or on averages; and since the benefits for past 
services are not compensation, the question of equities as be- 
tween different employees and classes of employees does not 
become so acute. In dealing with present employees already 
of the age to be retired the question is simply, Is a relation- 
ship to salary desirable? If it is regarded as desirable it can 
be created in respect to past services by the simple device of 
direct relation, either to the terminal salary or one of its 

304 



THE PRESENT EMPLOYEES 

variants or to the average salary throughout service. Where 
records are imperfect the average salary of the last few years 
is a desirable basis. 

In thinking of the question of the relation of the amount 
of benefit to salary, it is convenient to assume that two em- 
ployees are involved, both of whom entered the service at the 
average age for new entrants and served continuously to the 
same retirement age, and that one is in receipt of a fairly large 
salary and the other of a low wage. Should the amount of 
the superannuation allowance granted the two men in respect 
to their past service be the same, or should it be proportional 
to or related to their salaries? Except in so far as the allow- 
ance may be liquidated damages for loss of position, neither 
employee has ground to claim any allowance as a right. 
Should the government give a larger gratuity to one than to 
the Other? The minimum of subsistence for the two em- 
ployees is essentially the same amount and unless at least that 
amount is granted hardship may result. If a full minimum 
of subsistence is given to the lowly paid employee, should a 
larger sum be given the more highly paid man, or should it 
be assumed that since he has been drawing a high salary, he 
has made or should have made other provision, and that the 
responsibility of the government ends when it has so provided 
that he shall never be in actual want so long as he lives? It 
would seem as if the government had done its duty when it 
had provided that none of its present employees who have 
served it for a long period should ever be in actual want, but 
not infrequently retirement systems give benefits proportional 
to salary to present employees who are already at the retire- 
ment age. If such a procedure seems desirable care must 
be taken to set up a minimum below which no allowance shall 
go for a man who has served the government all his life; that 
is, account must be taken of the fact that the low-paid man 
requires a far higher percentage of his salary in order to be 
able to purchase the necessaries of life than does the more 
highly paid man. 

305 



RETIREMENT OF PUBLIC EMPLOYEES 



Amount of 
Benefit in 
Relation to 
Service 



Very low-paid employees may present a special problem 
in some services if no relationship to salary is provided. If 
an employee has been receiving less than the minimum of sub- 
sistence as his active wage, should he be retired with a pen- 
sion of a greater sum than he has been earning? If the salary 
has been low because the position required only part time 
service, the obvious answer is either that the amount should 
be reduced or else that the system should not extend to part 
time employees. If, on the other hand, the employee has been 
giving full time service, a rather interesting social question is 
presented which has too many ramifications to be considered 
here. If the decision is to make no distinction in the amount 
of the pension, and to give the employee a larger amount as 
pension than he has been earning as salary, the logic of the 
situation would demand the increase of the active salary of 
all such employees remaining in the sendee to at least the 
amount of the pension. Except as a distinctly temporary ex- 
pedient retirement allowances that exceed active pay are so- 
cially indefensible. 

In discussing the question of the relation of the amount of 
the benefit to the length of service, it is convenient to assume 
that two employees are involved, each of whom is receiving 
the same wage, and that one has served the government since 
early youth and that the other has been improvidently ap- 
pointed late in life. Should the government give the same 
retirement allowance to each or should it relate the amount 
to the length of service? The system for future entrants in 
a complex service should undoubtedly provide a relationship 
between length of sendee and amount of benefit, in order to 
offer the employees some inducement to remain until the com- 
pulsory age, and to give recognition to the fact that the young 
entrant must make all his provision for the future while serv- 
ing the government, whereas the older entrant should have 
made some provision in the years prior to his entry. Since a 
relationship is to be provided for future entrants, it would 
probably be well to create one for the present aged employees. 

306 



THE PRESENT EMPLOYEES 

Not without weight is the argument that he who has served 
the government all his life is entitled to more consideration 
than he who has served it but a few years. 

If the decision has been in favor of a uniform grant of a 
minimum of subsistence to all employees who have served at 
least a given number of years, say, for instance, $600 for all 
who have served forty years or more, and in favor of a pro- 
portional allowance to all who have served less than forty 
years, which in the case of this illustration would be $15 for 
each year of service, a question would arise as to whether 
any minimum should be established below which no allow- 
ance should go. If an old man of 69 had been appointed just 
a year before the establishment of a system with 70 as the 
compulsory retirement age, should he be retired with an allow- 
ance of only $15 a year? Clearly if he is dismissed in pov- 
erty, the government is responsible only in so far as it refuses 
to continue an employment contract which should never have 
been entered into, unless the facts of the case were excep- 
tional. The poverty is largely the result of what the employee 
did or failed to do prior to the establishment of the system. 
The government might, it would seem, make the assumption 
that the employees who have come to it late in life have made 
some provision in their earlier years and hence it provides for 
them only in respect to those years in which they serve it. 
Exceptional cases of hardship and distress will be left to the 
charitable agencies of the community, both public and pri- 
vate, in preference to establishing the system on the basis 
that all late appointees have been improvident persons who 
must be given a large gratuity through the government 
system. 

The economic needs of the present aged employees are in The Amount 
all probability essentially the same as the needs of the future g f en ^ t in 
entrants. The difference between the two classes arises from Relation to 
the fact that the present aged employees have rendered their Need" 1 " 
full term of service under a system which placed full responsi- 
bility for meeting these needs on them personally, whereas 

3°7 



RETIREMENT OF PUBLIC EMPLOYEES 

the future entrants render all their sen-ice under a system of 
compulsory savings. To compel an employee to save for the 
necessaries of his standard of life in his old age is a very 
different matter from giving him in his old age, over and 
above any other provision which he may have made, the full 
amount required for the necessaries of his standard. Large 
benefits to present aged employees cannot in fact be justified 
by the same arguments which can be advanced in the case of 
the future entrants. The weight of the arguments would in 
fact seem to favor for present aged employees who have 
served the government throughout their active career, a grant 
of a uniform pension of approximately the minimum of sub- 
sistence without regard to salary. 

Employees Continued After Adoption of System : 
Benefits for Past Services 

The Contingencies to Be Covered. In the interests of the 

government, the retirement system will have to allow to pres- 
ent employees continued on the active rolls after the installa- 
tion of the system benefits in respect to past services in event 
of disability and of superannuation. Since these bene- 
fits are not part of compensation withheld from payment 
at the time the services were rendered, the employee is not 
entitled to any payment in case of death in the active service, 
dismissal or resignation, unless he contributes toward the cost 
of the benefits; and it is doubtful if the government is justi- 
fied in making any allowance from the public treasury in re- 
spect to past services in event of these contingencies. 






The Superannuation Benefit — The Cost of the Benefit. In 
providing benefits for past services for employees who are con- 
tinued on the rolls after the system is established, the obvious 
practice is to consider length of service in one way or another. 
To the young present employee only a very small allowance 
will be promised on retirement because he has served but a 
short time, whereas to the older present employee of long 

308 



THE PRESENT EMPLOYEES 

service a far larger amount will be promised. The cost of 
the benefit will, therefore, depend in each individual case, to a 
considerable extent, on the length of time the employee has 
served. 

The Division of the Cost. The feasibility of dividing the 
cost between the employees and the government, if such a pro- 
cedure seemed desirable, would turn on two points, the age 
of the employee at the date the system went into effect, and the 
number of years of prior service. The very young present 
employee could conceivably be assessed for a considerable part 
of the cost of any benefits in respect to past services because 
the amount of such benefits would be small and payment could 
be made in many small installments distributed over a long 
period. The older present employees with long service could 
not possibly bear an equal proportion of the cost of their own 
retirement benefits in respect to past services, because the cost 
of these benefits would be much larger and the period in which 
this cost could be accumulated would be much shorter. It 
follows, therefore, that if any part of the cost of benefits in 
respect to past services is to be assessed against the present 
employees, the amount of the assessment must depend on what 
the employees can reasonably bear and not be any fixed pro- 
portion of the total cost or of the premiums which would be 
required to meet that cost. 

In discussing the differences between the present employees 
and the future entrants it was pointed out on page 296 that 
the ability of the present employees to bear assessments is less 
than that of the future entrants. To compel them to purchase 
benefits in respect to past services may occasion them serious 
loss and much hardship. If the government finds that it can- 
not afford to pay the full cost of that superannuation benefit 
in respect to past service which it regards as socially and eco- 
nomically desirable, consideration should be given to the possi- 
bility of having the government promise unconditionally such 
benefits in respect to past services as it can afford to pay for, 

309 



RETIREMENT OF PUBLIC EMPLOYEES 

and to allow each employee the privilege of electing whether 
or not he will contribute for a benefit in addition to that prom- 
ised by the government. This question will be further con- 
sidered in the section dealing with contributions from present 
employees in respect to future services. ( Page 320. ) 



The Pro- 
gressively 
Diminishing 
Superannua- 
tion Age 



The Conditions upon Which Granted. The actuary can de- 
termine in the case of any individual employee the amount 
which would have to be in hand at the present moment, in- 
vested at a given rate of interest, in order to accumulate, by 
the time the employee reaches the retirement age, the cost 
of his benefit in respect to past services. This amount may 
be termed the actuarial deficit in respect to past services, and 
it is a convenient figure to have in mind in considering the 
question of the conditions upon which the superannuation 
benefit shall be granted for past services. This deficit in the 
case of employees already near the compulsory retirement age 
is, of course, generally large, because the employees have, as a 
class, had long service and will be retired shortly, whereas 
in the case of the more recent appointees, the deficit is small 
because they have had short service and will not as a class be 
eligible for retirement for a long period. The amount of the 
deficit will, of course, be affected by the age fixed for retire- 
ment, being considerably reduced by advancing the com- 
pulsory age. 

The suggestion of a progressively diminishing series of age 
conditions for superannuation retirement would seem to merit 
attention in considering benefits to present employees who will 
be continued in the service after the adoption of the system. 
If the system devised for future entrants permits superannua- 
tion retirement at 60, and makes it compulsory at 65 with 
retention in exceptional cases to 70, the proposal is that on 
the installation of the system these ages, in so far as the em- 
ployees are concerned, shall all be advanced, say 5 years, so 
that retirement is permitted at 65 and required at 70 unless 
the case is exceptional, and then the employee may be retained 

310 



THE PRESENT EMPLOYEES 

until 75. On each successive quinquennial anniversary of the 
establishment of the system the age conditions will be reduced 
by one year until at the end of 25 years they reach those estab- 
lished for future entrants. Each present employee, of course, 
knows at once what conditions are to apply to him. Those 
who are under 40 years of age know that the compulsory age 
in their case is 65, those between 40 and 45, that the age in 
their case is 66, and so on. 

The principal advantages of the progressively diminishing 
superannuation age are that it enables the initial compulsory 
retirement age to be placed high without seriously diminishing 
the ultimate good which the government is to derive from the 
system, and it takes cognizance of the fact that superannua- 
tion benefits can be provided more easily for young present 
employees than for older ones. A high compulsory age, more- 
over, eliminates much of the hardship that has its origin in 
compulsory retirement, because it markedly reduces the num- 
ber of employees who will be dropped from full active pay to 
small pensions on the inauguration of the system, without any 
warning. Notice of a few years enables the employees to 
make preparation. The high age also reduces the actuarial 
deficit in respect to present aged employees, and is desirable 
from that point of view. Since it reduces the hardship it may 
also permit the payment of somewhat smaller benefits than 
would seem just if the employees were retired without warn- 
ing at a younger age. The young employees will have the 
opportunity to add to their allowances for past services their 
allowances for future services, which, as they will be part 
of the compensation, can well be made more adequate, and 
hence they can be compelled to retire at a younger age. 

The Amount of the Benefit. In providing a benefit in re- In Relation 
spect to past services for present employees who will be re- to a ary 
tained after the establishment of the system, the founders will 
probably choose between one of three general types of de- 
vices : 

3il 



RETIREMENT OF PUBLIC EMPLOYEES 

i. An annuity of a certain fixed amount for each year of 
service, payable at retirement. 

2. An annuity of a certain fixed proportion of salary for 

each year of service, payable at retirement, or 

3. A credit on the employee's superannuation account of 

that amount which it would now contain had a de- 
posit been made to it each year of a certain propor- 
tion of the employee's salary, and the whole invested 
at interest, said credit to be available on superannua- 
tion retirement for the purchase of an annuity. 

The second device, it will be seen, establishes a definite rela- 
tionship between the amount of the benefit and the amount 
of the salary. Although it would be entirely feasible to base 
the calculations on the salary already earned in the past, and 
thus to make the liability incurred a sum certain, the prac- 
tice is generally to base it either on the terminal salary, or 
one of its variants, or on the average salary throughout serv- 
ice. This procedure is open to some of the objections that 
were advanced in respect to relating the superannuation bene- 
fits for future employees directly to salary. The amount of 
the liability for benefits in respect to past services thus fixed 
will be more or less contingent on future changes in salary. 
Administrative reforms may be impeded by that fact. Inequi- 
ties between employees may also arise to some extent if the 
employees contribute for benefits in respect to past services. 
For these reasons the first or the third devices would be re- 
garded as preferable by those who advocate savings and 
annuity systems. If they desired a relationship to salary they 
would select the third device, or if they felt that it was un- 
necessary they would select the first. 

In a savings and annuity system, it should perhaps be noted, 
it would be entirely feasible to distinguish sharply between 
benefits in respect to past services and benefits in respect to 
future sendees, and to have the benefits in respect to past serv- 
ices a fixed sum per year of service, and the benefits in respect 

312 



THE PRESENT EMPLOYEES 

to future services of present employees indirectly dependent 
on salary through the process of basing deposits in the super- 
annuation fund on salary and basing the amount of benefit on 
the purchasing power of these accumulations. 

The amount of the allowance for past services of present i n Relation 
employees who will be continued on the rolls after the estab- 1° L ^ n ^ th of 
lishment of the system must obviously be related to the length 
of that service. 

Employees who entered the service of the government at Treatment 
an exceptionally early age constitute a rather interesting prob- E ntr ants 
lem in this connection. To illustrate it, let it be assumed that 
present employees who are already of the age to be retired 
are to be granted an annuity of $15 for each year of service, 
with a provision that in no case shall the annuity exceed $600, 
or, in other words, that in no case shall more than 40 years 
of service be considered, and let it be further assumed that 
the proposal is to give similar allowances to present employees 
not yet of the age to be retired in respect to their past serv- 
ices. An employee who had entered the service as a messenger 
boy at the age of 15, and who is now 55 years of age, would 
then be entitled to the maximum of $600 in respect to past 
services, although he still has 15 years to serve before reach- 
ing the compulsory age, and will acquire further allowances 
in respect to that service. Similarly if one and one-half per 
cent of salary is to be allowed for each year of service with 
a maximum benefit of sixty per cent, this particular employee, 
although only aged 55, would already be entitled to the max- 
imum. 

An obvious remedy for such a situation is to adopt a rule 
that no services rendered before a given age shall be counted 
in awarding benefits for past services, but such a device is in 
many ways arbitrary. If 30 years is adopted as the limit, 
the employee who entered at 30 and has served a year gets 
an annuity in respect to that year of service, whereas the man 
who entered at 29 and has served a year gets nothing. A more 
satisfactory device would appear to be to adopt a scale of 

313 



RETIREMENT OF PUBLIC EMPLOYEES 

allowances for each year of past services of present employees 
who will be retained after the establishment of the system, 
according to which the exact amount of the allowance, per 
year of past service, will be determined by the age of the em- 
ployee on his entrance into the service. The procedure in de- 
veloping such a scale would be (a) To decide upon what may 
be regarded as a standard entrance age for the service, (b) 
to decide what would be the proper annuity to have paid an 
employee who had entered at that standard entrance age, and 
at the time of the establishment of the system was exactly 
at the compulsory retirement age, (c) to divide the amount 
of the proper annuity so decided upon by the number of years 
which must elapse between the standard entrance age and the 
compulsory retirement age and thus to secure the standard 
rate to be allowed per year of past services to those who en- 
tered at or above the standard entrance age, and (d) to divide 
the amount of the proper annuity decided upon by the number 
of years between the compulsory retirement age and each 
entrance age below the standard to determine the rate to be 
allowed for each year of past service to those who entered 
the service at any specified age under the standard age. 

Possibly two examples will make the suggestion clearer, one 
using the fixed allowance, and the other the proportion of 

salary : 

Example i. 

70 years = compulsory superannuation retirement age 
30 " = standard entrance age or normal entrance age 



40 " = amount of service to be rendered before payment of 
maximum benefit for past services is regarded as 
warranted 

$600 = maximum benefit to be granted in respect to past services 

$600 -=-40 = $15, standard amount to be allowed for each year of 
service to all who entered at 30 or over. 

70 years = compulsory superannuation age 

20 " = age at entrance of earliest entrant among present em- 
ployees 



50 " = service earliest entrant will render before 70 

314 



THE PRESENT EMPLOYEES 

$600 -4- 50 = $12, allowance per year of past service for employees 
who entered at 20 years 

The amount of allowance for each year of past service to em- 
ployees having entered under 30 would be similarly found. 

Example 2. 

70 years = compulsory superannuation retirement age 

30 " = standard entrance age or normal entrance age 

40 " = amount of service to be rendered before payment of 
maximum benefit for past service is regarded as 
warranted 

60 per cent of salary = maximum benefit to be granted in respect 
to past services 

60 per cent -f- 40= 1.5 per cent standard proportion of salary to 
be allowed for each year of past services to all who 
entered at 30 or over 

70 years = compulsory superannuation age 

15 " =age at entrance of earliest entrant among present em- 
ployees on staff 

55 " = service earliest entrant would have to render before 
reaching age of 70 

60 per cent-f- 55 = 1.09-f- per cent = allowance per year of past 
services for employees who entered at 15 years. 

If the more elaborate device of crediting the employee's 
superannuation account with the amount it would now contain 
had certain deposits been made in it annually is adopted, the 
percentage of salary deposited would be made the same for 
all who entered at thirty or over and that for entrants below 
thirty would be so reduced that it would provide the maximum 
desired proportion of salary as a benefit at the compulsory 
age. 

Benefits in respect to past services, as has been seen, par- in Relation 
take of the nature of gratuities, and although they may in N ee d° nomi 
some instances become the consideration that retains an em- 
ployee in the service, few employees could pay for them by 
deductions from their current earnings. They must come 
from the taxpayers. They are not, moreover, grants to take 

315 



RETIREMENT OF PUBLIC EMPLOYEES 

the place of the individual's private provision for himself, 
as are the benefits for future entrants in a comprehensive sys- 
tem; they are merely grants to supplement the provision al- 
ready made privately. The standard benefit would seem to 
be, therefore, the minimum of subsistence for a present em- 
ployee who entered at the average age and served to the com- 
pulsory age. Benefits per year of past service would be cal- 
culated from this standard in the method just described. Such 
an arrangement is, however, perhaps naturally unpopular with 
the more highly paid employees who seek a benefit proportional 
to salary which will give them more nearly the necessaries of 
their standard of life, but it is difficult to see how large bene- 
fits in respect to past services are to be justified, since the em- 
ployees have already supposedly been paid in full for their 
work. The rule should apparently always be low benefits for 
past services. 

The Disability Benefit — The Cost of the Benefit. Disability 
insurance, it will be recalled, is essentially different from super- 
annuation insurance, because it does not require the accumula- 
tion of so large a reserve. If a thousand employees should 
enter the service in youth and remain to the compulsory super- 
annuation age, they would make no demands on the superan- 
nuation fund for years and then they would all come upon it 
more or less in a body. Disability is entirely different. The 
disability fund is always under a load, which is heavier at 
some ages than at others, but it never has to carry any con- 
siderable fraction of the employees. To provide disability 
protection for the present employees is, therefore, not a diffi- 
cult matter, but the disability system for them must be made 
to harmonize with the superannuation system developed for 
them and with the system for future entrants. 

The Conditions upon Which Granted. Present employees 
who are retained after the adoption of the system should be 
subject to the same rules regarding proof of disability that are 

316 



THE PRESENT EMPLOYEES 

prescribed for future entrants. If a progressively diminishing 
superannuation age is adopted it would doubtless be expedient 
to keep the permissive retirement age always the same number 
of years below the compulsory age, and require any employee 
who desired to retire in the ages between the permissive age in 
force at the time and the permissive age as established for fu- 
ture entrants to prove actual disability. 

The Amount of the Disability Benefit. Since both the su- 
perannuation system for present employees and the entire 
system for future entrants have to be considered in working 
out the disability benefit in respect to past services, it will per- 
haps be best to describe briefly two possible solutions of the 
problem. 

If future entrants have been promised superannuation and 
disability benefits directly proportional to salary, the same 
proportion of salary is generally allowed for each year of 
service, whether the employee is superannuated or disabled. 
Benefits to present employees for past services under such a 
system are likely to be proportional to salary also, and again 
the distinction between a superannuation benefit and the disa- 
bility benefit lies only in whether proof of disability is re- 
quired. The disabled present employee would get the same 
allowance for his past services as he would have received had 
he continued to the superannuation age. 

If the system for future entrants has been devised to give 
equality of return and equality of protection, the amount of 
the superannuation benefit for future entrants will be based 
on the purchasing power of accumulations from contributions 
proportional to salary, and the disability benefit will be possi- 
bly the annuity which this accumulation will purchase for the 
employee at the age when he is disabled plus a special dis- 
ability insurance of an annuity of a fixed sum. Present em- 
ployees who are continued in the service after the adoption 
of the system would in all probability be insured for the 
annuity of the fixed sum, and would have a superannuation 

317 



RETIREMENT OF PUBLIC EMPLOYEES 

account in respect to future services. In case of their disabil- 
ity they would be granted (i) the annuity of the fixed sum, 
(2) the annuity which their accumulations in respect to future 
services would purchase, and (3) the annuity which could be 
purchased by the present value, at their age when disabled, 
of the benefits promised to them in respect to past services. 

Employees Continued After Adoption of System 
Benefits for Future Services 

The Contingencies to Be Covered. Benefits in respect to 
future services, as has been noted, tend to become part of 
compensation and hence the present employees who continue 
in the service after the adoption of a retirement system have 
equities in these benefits which they do not have in benefits for 
past services. The older present employees are not of course 
much concerned over such equities, as the value of their bene- 
fits in respect to future service will be comparatively little, 
and the chances of their wishing to resign to enter other work 
are comparatively slight. To the younger employees, on the 
other hand, these equities are practically of the same im- 
portance that they are to future entrants, and they will wisely 
seek to have recognized their claims to benefits in event of 
early death, resignation or dismissal, as well as in event of 
disability and superannuation. 

To permit of recognition of this difference between the 
older and the younger present employees, it might prove 
feasible to allow the present employees who will remain after 
the system is established to choose, in each individual case, 
whether the premiums paid for benefits, either by themselves 
or by the government, shall be used for the purchase of larger 
superannuation and disability benefits with forfeitures in event 
of death or withdrawal or whether they shall be used for the 
purchase of smaller superannuation and disability benefits 
with no forfeitures. Possibly it might be wise to establish 
an age limit below which an employee would not be permitted 

318 



THE PRESENT EMPLOYEES 

to elect to forfeit, so that a barrier against dismissals and 
forced resignations would not be created in the case of com- 
paratively young men. If comparatively small benefits are 
granted in respect to past services the older employees would 
doubtless be anxious to supplement the superannuation and 
disability benefits to the greatest possible extent, and they may 
already have protected themselves against death through life 
insurance. 

The Superannuation Benefit — The Cost of the Benefit and 
Its Distribution. The method to be followed in distributing 
the cost of the benefits in respect to the future services of 
present employees will probably depend very largely upon 
the type of system adopted for future entrants. Since the 
younger present employees and the future entrants will doubt- 
less fairly soon be brought into parallel positions it is highly 
important that the schemes for the two should be closely cor- 
related, so that neither class can point to the other and say 
to the government, "You are doing far more for them in re- 
spect to current service than you are doing for us." 

If the system devised to provide superannuation benefits for Under 
future entrants is designed on the savings and annuity plan a nd ings 
to give equality of return, and if the contributions made by Annuity 
the government are alike for all employees, either the same 
amount or the same percentage of salary, the obvious pro- 
cedure is for the government to make exactly the same con- 
tribution for each present employee as is made for each future 
entrant. 

If the savings and annuity system devised varies the amount 
of the deposit according to the age of the future entrant upon 
appointment, and if the government pays half of the required 
deposit and the employee half, the situation becomes more 
complicated, because the standard of equal pay for equal 
work is more or less abandoned. Two possible courses would 
seem to suggest themselves, ( i ) that the government pays that 
amount or at that rate which it would have paid had the 

319 



RETIREMENT OF PUBLIC EMPLOYEES 



Under 

Plan 

Basing 

Benefits 

Directly 

on Salary- 



Enforced 
Contribu- 
tions 



system been in force at the time the appointee entered the 
service, or (2) that it pays the amount or at the rate it would 
have paid had the employee been a new entrant at the date 
the system was established. If the government makes a rea- 
sonable allowance in respect to past services the first of these 
courses would seem the more advisable. The government 
could then say to its present employees and to its future 
entrants, "We have taken care of past services as an entirely 
separate and distinct matter; in respect to future services we 
are treating all employees just as they would now be treated 
had the system been in force always." 

If the system devised for future entrants bases the amount 
of the superannuation benefit directly on salary, and the sys- 
tem for present employees is to follow the same course, the 
distinction between the past services and the future services 
of the present employees becomes mainly academic. The prac- 
tical course is probably to establish two distinct systems, one 
for present employees, and the other for future entrants. 
The system for future entrants would provide comparatively 
large benefits in event of the several contingencies and would 
require fairly large contributions from the employees whereas 
that for the present employees would not cover all the con- 
tingencies, would grant smaller benefits, and would not re- 
quire such large contributions, although it might give the em- 
ployees the option of contributing to secure additional benefits. 
The difference in the size of the benefits granted and in the 
contributions required by the two schemes would in all proba- 
bility tend to prevent one class of employees from feeling that 
the other had the better of it. 

The question of forcing present employees to contribute 
toward the cost of the benefit demands careful consideration, 
whatever type of system may be adopted. Unless salaries are 
raised at the time the system goes into effect present em- 
ployees will in some instances encounter a great deal of in- 
convenience and possibly actual hardship if they are called 
on to pay contributions. The ideal course apparently would 

320 



THE PRESENT EMPLOYEES 

be for the government to offer unconditionally to the present 
employees such benefits as it can afford and thinks desirable 
to give for past services and to give unconditionally in respect 
to future services the same benefits or contributions toward 
benefits that it proposes to give at its own expense to future 
entrants, and then to permit the employees some choice as to 
whether they will themselves contribute toward additional 
benefits. 

The extent of this option may be limited by the rules or 
the employees may be left absolutely free to use their own 
discretion. The London County Council Superannuation and 
Provident Fund Act permitted the employees to remain out- 
side the scheme if they proved annually that they were making 
privately sufficient provision to protect themselves, and a sim- 
ilar clause might well be included in rules of the systems for 
present employees, many of whom will already have invest- 
ment of some kind. Another possible device is to recognize 
that the creation of a retirement system will result in many 
promotions and to make the employees contribute for addi- 
tional benefits in the event of promotion. If the system is 
operated on the savings and annuity basis a great deal of lati- 
tude may be given the different employees because each would 
probably have his own individual account. To simplify salary 
paying, all would probably be required to accept the same frac- 
tion of salary each month, enough less than one-twelfth to 
leave a balance due which would cover the amount of the 
larger contributions. Quarterly or semi-annually the balance 
remaining after the authorized contributions have been de- 
ducted would be paid to the employee. 

The Conditions upon Which Granted and the Amount of 
the Benefit. The foregoing discussion of the cost of the su- 
perannuation benefit and the section dealing with the past 
services of present employees continued after the adoption of 
the system contain the general points that one would make 
regarding the conditions upon which the superannuation bene- 

321 






RETIREMENT OF PUBLIC EMPLOYEES 

fit would be granted and the amount of the benefit for the 
future services of present employees. 

The Disability Benefit. The disability benefit in respect to 
future services of present employees has also probably been 
sufficiently discussed in the preceding section. 

The Benefit in Event of Withdrawal. In a system operated 
on the savings and annuity basis, the employee who is dis- 
missed or who resigns would be granted (a) all his own con- 
tributions, except those consumed in disability insurance, and 
(b) under an ideally social system, such contributions as have 
been made by the government in respect to the service which 
he has rendered subsequent to the establishment of the sys- 
tem. If the benefits are made proportional to salary the em- 
ployee would receive his own contributions and the actuarial 
reserve which has been accumulated to provide his benefits 
in respect to future service or its equivalent. 

The Benefit in Event of Death. The benefit in event of 
death would be essentially the same as the benefit in event of 
withdrawal. 

Summary of Important Points 

Present employees are not a homogeneous group and must 
be divided into those who will be retired immediately upon 
the adoption of the system, and those who will be continued 
after the system has been installed. In dealing with this lat- 
ter group service rendered prior to the installation of the sys- 
tem must be distinguished from subsequent service. 

The present aged employees who will be retired imme- 
diately cannot pay any of the cost of their benefits. The gov- 
ernment must provide such benefits gratuitously as the cost 
of securing a service-improving device. 

The present employees who will be retained after the estab- 
lishment of the system cannot as a class pay any considerable 
part of the cost of their benefits in respect to past services. 

322 



THE PRESENT EMPLOYEES 

Any payments which they may be required to make must be 
based on their ability to bear the burden. The ideal course 
would be for the government to give free without condition 
such benefits as it can afford and thinks wise, and to permit 
the employees to exercise an option in each individual case 
as to whether they will contribute to supplement these bene- 
fits. The same course would apparently be wise in respect to 
future services of present employees, possibly with some limi- 
tations. 

Since the government must bear the cost, and since bene- 
fits for past services partake of the nature of gratuities, the 
cost must be kept down (a) by providing benefits in respect 
to past services only in event of superannuation and disability, 

(b) by establishing rigid conditions for granting benefits with 
high initial compulsory superannuation retirement ages, and 

(c) by reducing the amount of the benefits granted to a stand- 
ard of the minimum of subsistence to be paid only for service 
from the ordinary or standard entrance age to the com- 
pulsory retirement age, and by granting proportional benefits 
for shorter service. 

Rigidly reducing benefits in respect to past services is so- 
cially justifiable because the benefits are to supplement the pro- 
vision which the employee has already made privately, and not 
to take the place of such provision. This difference between 
the purpose of benefits for present employees in respect to past 
services and the purpose of benefits for future entrants necessi- 
tates the use of a different scale of benefits for the two classes. 

Benefits for past services should be related to length of 
service. In case an employee is forced out by the compulsory 
retirement age after very short service, the system should 
assume that he has made private provision in the period be- 
fore he was appointed. Exceptional cases of hardship can 
be cared for temporarily by some form of public relief. Such 
a procedure seems preferable to making large charitable 
grants for short service without reference to the need. 

The weight of the argument is apparently against any rela- 

323 



RETIREMENT OF PUBLIC EMPLOYEES 

tionship between the amount of the benefit for past services 
and the amount of the salaiy. The fixed allowance, per year 
of service, alike for all, with possible exceptions in the case of 
very early entrants and very low-paid employees, would seem 
to be the preferable device for present employees. 

The system for present employees must be recognized as 
temporary and transitional and should be entirely distinct 
from the comprehensive adequate system devised for future 
entrants. 



CHAPTER XIV 

THE ACTUARIAL RESERVE PLAN VERSUS THE AS- 
SESSMENT OR CASH DISBURSEMENT PLAN 

The Difference Between the Two Plans. The Disguised Assessment 
of Cash Disbursement Plan. The Merits and Defects of Assess- 
ment or Cash Disbursement Plan. The Two Merits. The Four De- 
fects. The Merits and Defects of the Actuarial Reserve Plan. The 
Four Merits. Defects Can be Overcome. 



The Difference Between the Two Plans 

In respect to the time at which the money to meet obliga- 
tions is raised, retirement system may be operated in two gen- 
eral ways, ( i ) on the assessment or cash disbursement basis, 
and (2) on the actuarial reserve basis. Under the pure as- 
sessment or cash disbursement plan, no fund is established 
and all benefits are paid annually as they fall due from the 
current revenues of the government. If contributions are col- 
lected from the employees they are simply included as general 
revenues and are immediately paid out. Under the actuarial 
reserve plan a fund is established, and at regular intervals, 
generally on pay days, is turned over to the fund a sum which 
broadly speaking will be sufficient with the compound interest 
it will earn to pay for all the benefits which will ever fall due 
as the result of the services rendered during the period cov- 
ered by the payment. All the money coming in on account 
of the retirement system is invested at interest and all benefits 
are paid from this fund. 

Three distinct differences between the two systems should 
be clearly recognized. 

1. Under the actuarial reserve plan the taxpayers who re- 
ceive the service pay all the obligations incurred by the gov- 
ernment in respect to that service; whereas under the assess- 

325 



The 

Two Plans 

Described 



Important 
Differences 

In Respect 
to Tax- 
payers 
Who Bear 
Burden 



RETIREMENT OF PUBLIC EMPLOYEES 



In Respect 
to Interest 



In Respect 
to Propor- 
tion 

Between 
Salaries 
and 
Payments 



ment or cash disbursement plan the taxpayers at the time the 
service is rendered pay the immediate wage only and leave for 
some future taxpayer the payment of the prospective benefits 
which have accrued in respect to that service. Future taxpay- 
ers under the assessment or cash disbursement plan pay the 
immediate wage for the services rendered them and the retire- 
ment benefits which mature in their day in respect to services 
rendered a prior generation. Under the cash disbursement 
system the generation establishing the system escapes with 
little or no payment and passes the burden to the future, 
whereas under the actuarial reserve system each generation 
pays its share. 

2. Under the actuarial reserve system, the money avail- 
able for payments has come in part from taxes and in part 
from the interest earned by this money in the time between 
its collection and its disbursement, whereas under the assess- 
ment or cash disbursement plan all the money comes directly 
from the taxes and no interest is earned because practically 
no time elapses between the collection of the money and its 
disbursement. 

3. L T nder the actuarial reserve plan the amount required 
from the taxpayers annually for the retirement system bears 
practically a fixed proportional relationship to the sum raised 
for the immediate wages of those in the service, whereas un- 
der the assessment or cash disbursement plan the proportion 
between the amount required for retirement benefits and the 
amount required for wages is for several generations con- 
stantly increasing. 



The Disguised Assessment or Cash Disbursement Plan. 
The three differences just cited are the principal ones distin- 
guishing a true actuarial reserve system from a true cash dis- 
bursement or assessment system. Unfortunately in studying 
retirement experiments one frequently encounters a system 
that was founded in the belief that it would operate on the 
actuarial reserve basis, but this belief was based on faith and 

326 



ACTUARIAL RESERVE VS. ASSESSMENT 



not on actuarial science. Such systems are the curse of the 
retirement problem. Their history is somewhat as follows: 
Provision is made for the payment into a fund of a small pro- 
portion of all salaries and from the fund thus created retire- 
ment benefits are to be paid. In the early days the amount 
in the fund grows rapidly, as almost all those who were in 
the service when it was created are paying into the fund and 
practically none are retiring. At this stage the fund is fortu- 
nate if it escapes successful demands for increased benefits 
claimed because the fund is so prosperous. 1 After the lapse 
of a good many years, perhaps fifteen or twenty, the number 
of living beneficiaries of the fund become so great that the 
annual contributions are no longer sufficient to pay the bene- 
fits and resort must be made to the accumulated funds. In- 
creasing demands gradually wipe out the entire reserve and 
the system faces as alternatives (i) continued operation on 
the assessment or cash disbursement basis or (2) reorganiza- 
tion on the actuarial reserve basis. The essential difference 
between this apparent actuarial reserve scheme and a real 
actuarial reserve scheme is that under a real actuarial reserve 
scheme the fund grows and grows until a point is reached, 
many, many years after its establishment, 2 when the number 

1 For a striking illustration of the tendency to increase benefits be- 
cause of the growth of the fund, see the Report of the Committee 
of the Board of Trade in Railway Superannuation Funds (British 
Parliamentary Papers, 1910, Vol. 57, especially page 6). The man- 
agers of the funds were misled, in some cases by their account- 
ants, into the belief that the actuaries had been over-cautious and 
that the growth of the reserve showed that larger benefits could be 
paid. One fund that stuck to its original actuarial plan remained 
solvent, while the others that ignored the advice of the actuaries got 
into grave financial difficulties. 

2 The following extract from the testimony of Mr. George F. 
Hardy, then President of the Institute of Actuaries, answers simply 
a common question : 

"I have often wondered why it takes so long as eighty years to get 
a stationary condition ; could you briefly explain that ? — It depends 
upon the greatest length of life to which any of the entrants can 
attain. The entrants come in at the age of eighteen and it is possible, 
according to the Mortality Table employed that they should live to 
one hundred or so, and if you have a sufficiently large number to deal 

327 



The 

History of 
Disguised 
Assessment 
Schemes 



How Dis- 
tinguished 
from Real 
Actuarial 
Reserve 



RETIREMENT OF PUBLIC EMPLOYEES 

of pensions reaches a stable maximum, when the number of 
new pensioners each year is approximately offset by the num- 
ber who die and when the annual contributions to the fund 
and the interest earned by the fund will meet all daily de- 
mands for payments. Under a true actuarial reserve fund, 
the fund itself is never exhausted unless the entire system is 
wound up and abolished. In a sendee of uniform size, the 
fund grows to its maximum and remains at that point. Neces- 
sity for diminishing the size of the reserve fund in a growing 
or stationary service is generally an early indication of ap- 
proaching insolvency. Such funds must be classed as assess- 
ment or cash disbursement plans, however much their true 
nature may be disguised by the appearance of an actuarial 
reserve. To operate a system on an actuarial basis requires 
scientific computations, as will be discussed more at length 
in the following chapter. 

The Merits and Defects of Assessment or Cash Disbursement 

Plan 

The Two Merits. The cash disbursement or assessment 
plan is not without its advocates. The two principal argu- 
ments in its favor are that it is simple and it is safe. Noth- 
ing could be more simple than promising all employees cer- 
tain benefits and paying them when they come due out of the 
current revenues of the government. No elaborate collecting 
and investing machinery is required, and no nice actuarial 
computations and valuations are needed. It has all the pleas- 
ing simplicity of a charge account. The money to pay the 
claims in respect to present service is left, moreover, in the 
hands of the taxpayers until it is needed where the govern- 
ment assumes no responsibility for it. If the government col- 
lected it, it would be responsible for loss through mismanage- 

with you may have some reaching that age. Eighty years added on 
to age eighteen brings you to age ninety-eight, which for practical 
purposes we may consider the limit of life." — The Report on the 
Board of Trade Committee as Railway Superannuation Funds, Brit- 
ish Parliamentary Papers, 191 1, Vol. 29, Pt. I, p. 207, q. 5541. 

328 ' 



ACTUARIAL RESERVE VS. ASSESSMENT 

ment, bad investment and the other obvious dangers of a large 
fund. 



The Four Defects. Against the assessment or cash dis- 
bursement system four principal objections are raised. 

i. It is unbusinesslike and conducive to extravagance. 
Unless actuarial computations are made to determine what 
obligations are being incurred in respect to the services that 
are being rendered, no one knows what the real cost of these 
services is. 3 That purchasing services without knowing what 
they will cost is bad business practice scarcely admits of argu- 
ment. The fact that the cost of the benefits under the system 
is not definitely known makes it easier for the employees in 
the early days of the scheme to succeed in getting benefits in- 
creased. The immediate cost of too generous legislation un- 
der an assessment or cash disbursement system is so small 
that no one is disposed to offer much opposition to the em- 
ployees' demands, and it is only after the lapse of a good 
many years that the true cost of the proposal becomes ap- 
parent and then vested rights have arisen. This defect of the 
assessment or cash disbursement system can, however, be 
overcome by establishing what is sometimes called "a paper 
fund." 

If the system is operated on the paper fund basis all the 
actual money transactions are conducted just as they would 

3 "20,398. That leads me to ask you whether you attach impor- 
tance to creating such a fund or whether you would be of opinion 
that it would be sufficient that the fund should be merely a paper 
fund? — I would sooner create the fund. 20,399. Create a real fund? 
— Yes, I think the minds of statesmen, the chancellors of the Ex- 
chequer and of the Government, have considerably changed within 
the last thirty years in that sense. Thirty years ago the idea was to 
have no funds ; to pay everything into the Exchequer as it came. 
The consequence was that neither Minister nor head of a department, 
nor clerk ever watched the working of any scheme. The evil of not 
watching the working of a system has come forcibly home of late 
years, and our tendency now is to favor in any scheme of this kind 
the creation of a fund." — Sir R. E. Welby, of the Treasury, Second 
Report Royal Commission Civil Establishments; British Parliamen- 
tary Papers, 1888, Vol. XXVII, p. 403. 

3 2 9 



Unbusiness- 
like and 
Conducive to 
Extrava- 
gance 



The Paper 

Fund 

Method of 

Overcoming 

the 

Objection 



RETIREMENT OF PUBLIC EMPLOYEES 



Liability to 
Popular 
Misunder- 
standing 
and Attack 



The 

Argument 
of Equal 
Cost 



be in a system operated on the assessment or cash disburse- 
ment basis, but all the computations are made that would be 
required in operating a fund on the actuarial reserve basis. 
Each year the government is charged on paper with the 
amount which it would have to pay had a real fund been in 
operation, and the employees are credited with all their con- 
tributions, although as a matter of fact the contributions pass 
into the current revenue. The paper fund cannot of course 
earn interest and so a uniform rate of interest is assumed. 
Thus operated the system is subject to accounting control, but 
it costs almost as much to operate it on the paper fund basis 
as on the actuarial reserve basis, and the paper fund basis is 
open to the two following objections raised against the assess- 
ment or cash disbursement system. 4 

2. That the assessment or cash disbursement basis lays 
the scheme open to popular opposition and attack in times of 
economic pressure is the second main objection to it. For 
almost seventy-five years each successive annual appropriation 
for the retirement benefits is larger than the appropriation 
of the preceding year. Since no interest is earned by any 
fund to help defray the costs of the system, the amount levied 
against the taxpayers may within less than two decades be- 
come equal to what would have been levied annually under 
an actuarial reserve system, and from this point of equality 
the levy under the assessment or cash disbursement system 
goes on ascending, roughly speaking, for over fifty years. 
The amount taken from the taxpayers in the form of taxes 
is, therefore, very much greater under the assessment or cash 
disbursement system than it is under the actuarial reserve 
system, except in the first few years. 

An ingenious and interesting argument has been advanced 
by certain advocates of the assessment or cash disbursement 

4 The paper fund method has been used for the Indian Civil Service 
Family Pension Regulations according to testimony given before the 
Royal Commission on Civil Service Superannuation. See Report, 
British Parliamentary Papers, 1903, Vol. XXXIII, p. 123, q. 3485. 

33° 



ACTUARIAL RESERVE VS. ASSESSMENT 

system to show that the cost to the taxpayer is the same under 
either system. It is essentially as follows: A dollar today' 
invested at 4 per cent is worth two dollars in seventeen and 
a fraction years from now, and, therefore, taking two dol- 
lars from the taxpayer seventeen years from today in lieu 
of taking a dollar from him today does not change his burden 
at all, as the dollar or the property it represents is going to 
earn interest anyway and consequently the whole question 
resolves itself into one of who shall hold title to the property 
while it is earning interest and manage it and keep it invested 
and employed. They believe property is best left in the hands 
of the taxpayers until needed by the government for imme- 
diate expenditure. They contend further that the main rea- 
son for maintaining actuarial reserves is in the case of volun- 
tary associations so that the system would be solvent in case 
no new members should join, but that a retirement system 
for public employees is a permanent institution with successive 
generations of members coming on indefinitely and that the 
solvency of the system rests on the taxing power of the sov- 
ereign state. 5 

5 The following is the English summary of the remarks of Dr. 
Ernest Blaschke of Vienna at the Seventh International Actuarial 
Congress, Amsterdam, 1912 (Vol. 2, pp. 511-512) : 

"Dr. Ernest Blaschke, Vienna, considered the question whether 
the correct method of providing pensions for public officials was 
the level premium system with its resulting accumulation of reserves 
or the assessment system which would make the pension claims simply 
a charge on the taxes; the second is the method almost universally 
adopted even when the officials themselves make contributions. Dr. 
B. thought the former plan caused a needless amount of labor. In 
order to establish pension funds on the level premium system the state 
must collect higher taxes and the part of the taxes which is not 
required to meet current claims will be handed back by the state 
by the withdrawal from circulation of State Securities, which 
later on it will again place in circulation when the pension claims 
demand it. Such being the position, Dr. B. said it might well be 
asked what object is attained if the state collects these taxes only 
immediately to hand them back. Dr. B. then dealt with the ques- 
tion whether the assessment system as opposed to the level pre- 
mium system did permit of lowering the burden placed on future 
generations. At the commencement in the case of the level premium 
system the claims would be less than the premiums collected and 

331 



RETIREMENT OF PUBLIC EMPLOYEES 

The It is a pretty argument and from the theoretical standpoint 

of C £he t seems flawless, but it creates an idealized taxpayer with many 

Argument f the qualities of the economic man. It ignores the point 
of view of the ordinary everyday taxpayer who votes at elec- 
tions and is more or less the final authority in matters of gov- 
ernment. When seventeen years from today all taxpayers 
are called upon for two dollars in lieu of the one they were 
saved today, few of them will appreciate that they were saved 
a dollar seventeen years ago ; in fact, some of them would 
say if told so that seventeen years ago they did not own the 
property on which they are taxed and hence could not have 
been saved the money. The man who was actually saved a 
dollar may have spent it in consumption and may be irritated 
by the growing demands for retirement liabilities. Although 
it must be admitted that a retirement fund on the actuarial 
reserve basis is not necessarily a productive force and does 
not necessarily earn anything and that it affects the distribu- 
tion of wealth far more than it affects its production, yet even 
so it would still seem that the fund serves a real purpose, not 
met by the assessment or cash disbursement system, in pro- 
tecting the whole retirement scheme from political and popu- 
lar misunderstanding and attack. It may be questioned, too, 
whether the creation of a fund is not a form of compulsory 
saving enforced on the taxpayer that may result in an increase 
in the world's capital and in its productive force. 6 This in- 

the balance would be set aside for later times. "When those times 
arrived, the cost of the pensions would be less than under the alter- 
native systems. This would, however, only be true if with the growth 
of the reserve there was no steady increase in the number of tax- 
payers and in the number of those for whom pensions have to be 
provided. On account of this increase it has been found that in Aus- 
tria-Hungary, for example, funds established on the level premium 
system could not have claimed the advantage of a reduction in the 
burden per individual when compared with the assessment system. 
If the state provides pensions suitable to the social positions of its 
officials, with the reduction in the purchasing power of money in- 
creases in pensions would become necessary. Xo actuarial calcula- 
tions could provide for this contingency." 

6 "Social Insurance,'' by I. M. Rubinow, Henry Holt & Co., Xew 
York (1913), p. 364. 

332 



ACTUARIAL RESERVE VS. ASSESSMENT 

genious argument ignores, moreover, the following objections 
to the assessment or cash disbursement plan. 

3. The assessment or cash disbursement plan is in- Inequitable 
equitable as between successive generations of taxpayers. Successive 
The generation that creates the scheme and binds the future Generations 
generations to pay the claims which will arise, escapes almost payers 

all financial responsibility. They have created the vested in- 
terests which the future generations will be called upon to 
respect, but they have failed to pay their part of the costs 
or to make any provision for their payment. Each successive 
generation will have to pay an increasing burden until the 
scheme at last reaches stable equilibrium if it ever does, and 
that depends on whether the public service continues to grow 
rapidly or whether it ultimately becomes reasonably station- 
ary. In no case under an assessment or cash disbursement 
system will each generation of taxpayers pay the exact cost 
of the services which it consumes itself. It may be argued 
that some of the services rendered today are for the benefit 
of the future generation and that they should bear their part 
in paying the costs and that is unquestionably true, but the 
method of providing for that is by raising money for such 
services through a serial bond issue or other device that will 
make each generation pay its reasonable share, and not in 
forcing on to the future all the payments for retirement bene- 
fits arising from the services rendered today regardless of 
who derives the benefit from these services. 

4. The final objection to the assessment or cash disburse- Not 
ment system is that it is ill adapted to the needs of a system 
designed to give equality of return to all employees and to 
give employees fair benefits in event of death in the active 
service, voluntary resignation or dismissal. Although not 
necessarily inconsistent with a contributory system, it is not 
readily adaptable to it, and unless a paper fund is established 
embarrassing questions are likely to arise as to whether the 
rates of contribution are fair as between the government and 

its employees and as between different classes of employees. 

333 



RETIREMENT OF PUBLIC EMPLOYEES 

Even with a paper fund question may arise as to whether the 
rate of interest used was a fair rate and whether the em- 
ployees could not have done better if there had been a real 
fund which they could have invested themselves through trus- 
tees. In this connection it should perhaps be noted that the 
employees are generally familiar with small building loans 
and other small loans on which the rate of interest is high. 
Not infrequently they will find it difficult to understand why 
the rate of interest allowed on a paper fund is so much lower 
than what they would pay to or receive from a building asso- 
ciation. Unless a paper fund is set up it is difficult to deter- 
mine what is a fair payment on resignation or dismissal. The 
absence of definite knowledge that arises under an assessment 
or cash disbursement plan works its way into many of the 
minute details of the system. It permits slovenly work in 
devising a system instead of demanding perfection of detail 
and it passes the burden of slovenly work on to the future 
to cause its trouble there in the form of friction between the 
government and its employees. 

The Merits and Defects of the Actuarial Reserve Plan 

The Four Merits. The arguments in favor of the actuarial 
reserve system are essentially the converse of the objections 
to the assessment or cash disbursement system. They may be 
summarized as follows : 

1. It is equitable as between successive generations of 
taxpayers, because each generation pays all the obligations in- 
curred for services to that generation. 

2. It is businesslike, for all obligations are recorded when 
incurred and adequate provision is immediately made for 
meeting them when they become due. 

3. It tends to safeguard the system from popular and 
legislative misunderstanding, because it makes the amount of 
the burden fairly uniform from year to year, and since a con- 
siderable part of the required payments are met by interest 

334 



ACTUARIAL RESERVE VS. ASSESSMENT 

earned by the fund it makes the apparent burden on the tax- 
payer if not the real burden materially less. 

4. It is adaptable. It easily meets the needs of a con- 
tributory system, and it makes return of contributions or their 
equivalent in event of death, resignation or dismissal easy, 
because the data for determining the amount due are already 
collected and tabulated and the reserve fund accumulating at 
interest is the proper source from which to make such pay- 
ments and they are immediately at hand and necessitate no 
special appropriation. 7 

Defects Can Be Overcome. The two objections to the 
actuarial reserve plan are that it is complicated and expensive 
and that it is dangerous. 8 

7 The following English summary of the paper by Mr. Rene Risser 
before the Seventh International Actuarial Congress, Amsterdam, 
1912 (Vol. 2, p. 528-529) is of interest: 

"Mr. Rene Risser points out the difference between the system of 
assessments and that of coverture [actuarial reserve]. According to 
the system of assessments the state fund would have been charged with 
6,600,000 francs in the first year [under the Old Age Pension Insur- 
ance Act] gradually increasing to 81,400,000 francs in 43 years, 
whereas, in the system of coverture the charge of the state would 
have amounted to 60,000,000 francs for each year. In the fifteenth 
year of the machinery of the bill, the increasing charges of the assess- 
ment system would have attained the amount of 60,000,000 francs, 
exceeding thus from the 16th year the uniform disbursement of the 
system of coverture. 

Mr. Risser is of opinion that taking the state as a whole and as 
an everlasting institution both systems can be considered as adequate 
where in the moment we have to do with an individual organization, 
for instance, a state railway company, the system of assessments is 
absolutely to be refused and the system of coverture is only to be 
admitted." 

As to Mr. Risser's personal opinion, he gives the preference to the 
coverture system also in case of obligation state insurance, because 
this system alone leads to serious examination of the financial bur- 
dens for a long time. In the assessment system, the attention of 
Parliament and still more of the population is often reserved to the 
smaller burdens of the first years, whereas the increasing charges 
of the future are easily neglected. 

8 "It will be observed that distinct pension funds administered as 
separate units, into which all contributions are paid, are maintained 
in connection with both the states teachers' pension systems in Great 
Britain . . . Similar funds are also maintained in connection with 

335 



RETIREMENT OF PUBLIC EMPLOYEES 

That it requires the maintenance of a complete system of 
records, periodical actuarial valuations, and the maintenance 
of an investment machinery must be admitted; they are the 
very essence of the system and cannot be eliminated. With- 
out them the system could not possibly work. Their absence 
is what has wrecked so many schemes which were founded in 
the belief that they would operate like an actuarial reserve 
system. It is doubtful, however, if the records which will be 
required for an actuarial reserve system will involve very 
many additions to the records which should be kept by civil 
service commissions, efficiency commissions and agencies deal- 
ing with standardization. Through a proper coordination of 
the central agencies dealing with personnel it would appear 
possible to develop a system of records that would fulfill many 
needs. Be that as it may, the cost of operation would be at 
most but a small fraction of the total sums involved and 
would probably be fully warranted as a means of securing 
knowledge as to the real cost of the system. 

The elements of danger in a large actuarial reserve are (i) 
that the power which control of a fund gives may be used 
for political ends, (2) that the administrators of the fund 
may prove dishonest and (3) that the fund may be lost 
through bad investment. 9 None of these objections seems 

the general pension systems of English cities, in which teachers par- 
ticipate . . . The superiority of this plan to that of placing the 
financial administration of the pension system directly in the hands 
of the state or city treasury is hardly apparent. Particularly . . . 
when it is realized that pension systems are not intended to be self- 
supporting, but must receive aid from public funds. The French 
plan, in which all contributions are paid directly into the state 
treasury and all pensions directly from it out of regular appropria- 
tions for the purpose, would seem to be the simpler and equally good, 
everything considered. The financial ability and integrity of the civil 
corporation ought to be sufficient to meet the self-imposed obligations 
of the pension laws, including the return of contributions in what- 
ever form in case of withdrawal from the service." — Teachers' Pen- 
sion Systems in Great Britain, Raymond W. Sies, United States 
Bureau of Education, 1913, Pamphlet No. 34, Whole Number 544, 

P- 79- . A . . 

9 "I think the general opinion in Germany is that in America the 
creation of large funds under Government control would cause great 

336 



ACTUARIAL RESERVE VS. ASSESSMENT 

insuperable, and the methods of overcoming them are fairly 
obvious. The trustees of the fund who are responsible for 
its investment should be selected on nonpartisan basis for 
fairly long terms, and the terms should be so arranged that 
changes in the membership would be gradual. Employees who 
have to deal with the funds themselves should be required like 
other public employees dealing with public funds to give fidu- 
ciary bonds. The types of investments which would be legal 
for the fund could be very definitely defined, and the amount 
which could be legally invested in any single enterprise or 
undertaking could be limited, and the whole system could be 
made subject to the same control that the state exercises over 
banking institutions and insurance companies. The govern- 
ment could thus secure for its system honest and conservative 
control; it might not be brilliant control, but safety with a 
reasonable return is all that is expected. 

temptation for their misappropriation. Their collection and distribu- 
tion would be too dependent upon politics. This opinion seems 
largely justified in view of the instances of maladministration that so 
many of your government departments have recently furnished. The 
German opinion is that the American citizen is as yet too individual 
in his honesty and efficiency. Collectively, as exhibited in the gov- 
ernment of your municipalities you seem to us weak in economical 
and effective business management and financial integrity." — Quota- 
tion from a German answer to Mr. Vanderlip's inquiry regarding 
the wisdom of establishing the German system of Social Insurance 
here ; in "Insurance for Workingmen," by Frank A. Vanderlip in 
North American Review, Vol. 181, Dec, 1905, p. 327. 



CHAPTER XV 

THE ESTABLISHMENT AND OPERATION OF A RE- 
TIREMENT SYSTEM ON THE ACTUARIAL RE- 
SERVE BASIS GENERALLY DESCRIBED 

Scope of Chapter. Question Independent of Who Pays Cost. Re- 
quires Services of Actuary. Planning Retirement System. Repre- 
sentation of the Parties. Position of Actuary. Establishing the 
System. Work of Actuary in Developing Premium Rates. Impor- 
tance of Devising Economical System of Records. Necessity for 
Collecting Data for Each System. Necessity for Conservative 
Assumptions. Actuarial Valuations of Established Funds. Neces- 
sity for Valuations. The Nature of the Work. How Often 
Necessary. 

Scope of Chapter 

The object sought in establishing a retirement fund on the 
actuarial reserve basis is to secure the payment into the fund 
at the time services are rendered of a sum which invested at 
compound interest will broadly speaking, pay all the benefits 
which the fund will ever be called upon to grant as the result 
of these services. The merits of the actuarial reserve plan, 
as contrasted with the alternative assessment or cash disburse- 
ment plan, have been set forth in the preceding chapter. The 
purpose of the present chapter is to describe in a general and 
non-technical manner how a fund is established and operated 
on an actuarial reserve basis. It is not of course intended for 
actuaries, but rather for the laymen who are called upon to 
work with actuaries. Those who are interested in the de- 
tailed actuarial processes will find of interest papers in the 
proceedings of the various actuarial societies and also nu- 
merous reports on valuations of individual funds. The Eng- 
lish and Scotch actuaries have had more experience with re- 
tirement systems than have American actuaries and conse- 

338 



OPERATION ON ACTUARIAL RESERVE BASIS 

quently the proceedings of their societies are richer in papers 
on the subject, and more reports of actuarial valuations are 
available regarding English and Scotch funds, but special at- 
tention should be called to the actuarial reports of the New- 
York Pension Commission, in which the actuary, Mr. George 
B. Buck, has presented the detailed formulae employed by him 
with a careful explanation of the symbols and methods used. 
This report was published in 191 6. As New York City has 
many different funds and as some of them were highly com- 
plicated, the actuarial report of the Commission covers a wide 
field of actuarial science as it is applied to retirement systems 
at the present time. 1 Attention should also be called to the 
report of Mr. Wm. A. Hutcheson, Actuary of the Mutual 
Life Insurance Company, on the Condition of the Public 
School Teachers' Retirement Fund of New York City, printed 
in the Sixth Annual Report of the Secretary of the Board of 
Retirement. This report contains a remarkably clear state- 
ment of the processes followed in the actuarial valuation. Mr. 
Herbert D. Brown's "Savings and Annuity Plan Proposed 
for Retirement of Superannuated Civil Service Employees" 
gives a good simple discussion of the mathematical basis of 
his plan. 2 The science is of course a developing one, and im- 
provements in technique are being made constantly. 

Question Independent of Who Pays Cost 

That a system may be operated on the actuarial reserve 
basis regardless of who pays the costs, the employer, the em- 

1 The New York funds valued were not being operated on a true 
actuarial reserve basis, and the report shows the enormous liabilities 
that accrue, without any provision to meet them, even in a compara- 
tively few years' operation under an assessment or cash disbursement 
plan founded in the mistaken belief that the mere establishment of 
a fund makes a system operated on the actuarial reserve basis. Un- 
fortunately other places have in some instances copied the defective 
legislation of New York and are headed toward the same difficulties 
in which New York finds itself. 

2 Senate Document, No. 290, 61 st Congress, 2d Session, reprinted 
in House Document, No. 732, 62d Congress, 2d Session. 

339 



RETIREMENT OF PUBLIC EMPLOYEES 

ployee, or the two combined, should once again be empha- 
sized. So far as the actuary is concerned the question of who 
pays the money is a matter of practically no importance. To 
avoid any possible confusion on this point that might arise 
from the use of the more familiar terms "contributions" and 
"contribution rates," the terms "premium" and "premium 
rates" will be substituted throughout the present chapter. The 
premiums and the premium rates will be the same regardless 
of who pays the money, unless the employees take an advan- 
tage of the system when the employer pays for it that they 
would not take if they paid for it themselves, but this element 
of selection can safely be ignored in the present discussion. 

Requires Services of Actuary 

That the establishment and maintenance of a fund on an 
actuarial reserve basis requires the services of an actuary 
and not of an accountant also deserves repetition. As will be 
described more at length in the following pages, the work in- 
volves forecasting the future on the basis of the past through 
the application of mathematical laws of probability, and the 
practical application of these laws is the profession of the 
actuary and not that of the expert accountant. Some expert 
accountants of course may be actuaries, just as some actuaries 
are expert accountants, but when a man qualified in the two 
fields deals with a retirement system he uses the methods of 
the actuary. The fact that several systems devised by ex- 
pert accountants who were not actuaries have come to grief, 
and that men of affairs are sometimes not aware of the true 
qualifications required for such technical computations makes 
it difficult to overemphasize the importance of having the 
work done by a member of the profession which specializes in 
actuarial science. 3 

3 Some of the English Railway funds made changes in their systems 
on the advice of their expert accountants and became insolvent. See 
Report of the Board of Trade Committee on Railway Superannuation 
Funds. British Parliamentary Papers (1910), Vol. 57, and (1911), 
Vol. 29. 

340 



OPERATION ON ACTUARIAL RESERVE BASIS 

The services of a competent actuary are required in the 
discussion of the plans for the system, in putting the scheme 
finally decided upon in operation, and after it is in operation 
in maintaining it in a constant state of solvency. 



Planning a Retirement System 

Representation of the Parties. Judging from the mistakes 
of the past, one would say that the ideal way to devise a re- 
tirement system would be to recognize clearly at the outset 
that an ideal system is a satisfactory compromise between the 
government, its employees and the public, so devised that it 
is financially sound; and accordingly to arrange that each 
party shall be suitably represented either in or before the body 
planning the system and that all shall have the advice and 
assistance of at least one impartial actuary. The interests of 
the government can be properly presented by the adminis- 
trative officers of the government, and by the legislative au- 
thorities, who will also represent the public. Unfortunately 
in devising retirement schemes representation of the em- 
ployees has frequently been omitted. Sometimes the em- 
ployees have scarcely been heard at all in the initiation of 
schemes, but more frequently the older experienced employees 
have been heard and the younger employees, the newer men, 
have had no voice. Yet the newer men, for the reasons set 
forth in Chapter one, page 17, are the only ones who have 
at all the point of view of new entrants to whose needs the 
scheme to be adopted must conform if it is to be a permanent 
success. To secure representation of the younger employees 
it would seem desirable to provide for formal and official 
organization of the employees into two or more classes ac- 
cording to length of service, to have each class elect repre- 
sentatives on a class committee which shall in turn elect repre- 
sentatives to confer directly with the representatives of the 
public and of the government. The whole body of employees 
could thus be represented formally and an organization could 
be created through which the various questions could be 

341 



Division 
of Em- 
ployees into 
Classes 



Referendum 
Votes 



RETIREMENT OF PUBLIC EMPLOYEES 

brought back to the great body of employees for discussion. 
Referendum votes on certain of the points in which the in- 
terests of the employees are the determining factor seem 
highly desirable and they have been used to marked advan- 
tage in some of the English services. Experience would tend 
to show, however, that they must be official and formal, with 
due provision for secrecy. In the attempted reorganization 
of the New York Teachers' Retirement Fund in 19 16, a refer- 
endum vote conducted openly through the ordinary line of 
authority resulted in friction and in charges that the older 
employees, being in positions of authority, attempted to in- 
timidate the younger employees and to influence the balloting. 
Some friction and charges of intimidation marked the early 
stages of the movement that culminated in the English Ele- 
mentary School Teachers' Deferred Annuity Fund. The 
English Teachers' experience shows further that when the 
employees are thoroughly informed of the details and know 
the costs, a considerable degree of harmony can be restored 
and that something approaching unanimity of opinion can be 
reached. 4 

Position of Actuary. To the actuary each of the three par- 
ties must be able to turn not only to know what the provision 
they desire will cost, 5 but also to know whether it is feasible. 
Not infrequently the layman works out something which is 

4 The experience of the British railway superannuation funds indi- 
cates that it is desirable to have the contributing members represented 
on the board of managers. The investigating committee suggested 
equal representation of the employees and the employers with a neu- 
tral arbitrator. See Report of the Committee of the Board of Trade 
in Railway Superannuation Funds, British Parliamentary Papers, 
1910, Vol. 57, p. 24. 

5 "The fundamental equation, 'Benefits equal contributions,' must be 
maintained. If the benefit is increased so must the contributions be 
increased in proportion, either by applying surplus funds thereto or 
by an increase in the scale of contribution. Neglect of this obvious 
precaution can only have a disastrous effect upon the funds ; com- 
plications will arise and serious trouble will begin." "Widows' and 
Pension Funds," by Archibald Hewat, Edinburgh, T. and A. Con- 
stable, 1912, p. 19. 

342 



OPERATION ON ACTUARIAL RESERVE BASIS 

apparently simple and desirable but actuarially is so compli- 
cated as to be impracticable; but generally the actuary can 
suggest a practicable method of securing the same end. Un- 
fortunately in the development of many retirement systems, 
the original plans have been drawn in the first instance by 
laymen without professional advice and finally when the 
actuaries have been called in to set matters straight they have 
not been able to start with whole cloth, but have been obliged 
to do the best possible job of patchwork. 

In addition to the actuary the government body would do 
well to have as an adviser someone who is familiar with the 
operation of retirement systems as they relate to social, eco- 
nomic and administrative problems, but such a person is less 
indispensable than a properly qualified actuary experienced in 
the valuation of retirement funds. The legislator is far bet- 
ter qualified to answer social, economic and administrative 
questions for himself than he is to attempt the complex 
actuarial computations that are necessary if the system is to 
be financially sound. 

Establishing the System 

Work of Actuary in Developing Premium Rates. After 
the general plan has been agreed upon the first work of the 
actuary is to develop, if he has not already done so, the exact 
premium rates that will have to be charged in lespect to each 
new entrant into the service. 

Four distinct processes may be recognized in the work Four 
which the actuary does in developing these rates. They are f™"* se i 
as follows: 

1. To determine by analysis the forces on which the cost 
of the system or the premiums will depend. 

2. To determine in so far as possible by exact measure- 
ment exactly how these forces have operated in the past. 

3. To develop rates which will indicate how these forces 
will probably operate in the future, or if no satisfactory data 
are available to permit of the development of such rates, to 

343 



RETIREMENT OF PUBLIC EMPLOYEES 

adopt suitable rates based on the past experience of other 
funds. 

4. To combine these rates with each other and with 
money rates to give the final premium rates. 
Forces on The forces on which the cost of the system depends are de- 

Depend C0St termineti largely by the type of system devised and the con- 
ditions upon which benefits are granted. An actuarially sim- 
ple superannuation system may be established, the stability 
of which will depend simply on the rate of interest and the 
rate of mortality after retirement on superannuation benefits, 
and a disability benefit may be added by bringing in the rate 
of disability, the rate of mortality in the active service, the 
rate of withdrawal and the rate of mortality after retirement 
on disability benefits. A highly complicated system might in- 
clude as forces determining cost the following factors: In- 
terest, Death in the active service occurring in the actual per- 
formance of duty, Death in the active service not occurring 
in the actual performance of duty, Resignation from the 
active service, Dismissal from the active service, Disability 
retirement, the disability occurring in the actual performance 
of duty, Disability retirement, the disability not occurring in 
the active performance of duty, Service or superannuation 
retirement, Death among employees retired because of disabil- 
ity incurred in the actual performance of duty, Death among 
employees retired because of other disability, Death among 
employees retired on superannuation or service benefits, The 
marital condition of employees, The condition of employees 
in respect to children, The condition of the employees in re- 
spect to parents, Death among employees' widows, The mar- 
riage rate of employees' widows, Death among employees' 
children, Death among employees' parents, The scale of 
salaries, The length of service of the employees, The age of 
the employees, The sex of the employees, The occupation of 
the employees, and The conditions upon which benefits are 
granted. Under conditions may be included the age and serv- 
ice limitations governing service or superannuation retirement 

344 



OPERATION ON ACTUARIAL RESERVE BASIS 

and the service limitations governing - disability retirement, 
which may be different according as the disability is or is not 
incurred in the actual performance of duty. Though it is 
doubtful whether a practical actuary would recommend the 
establishment of a scheme involving all these factors, he may 
be called upon to consider one devised by laymen in which 
each one is involved. 

When the actuary is called into consultation in planning the Measure- 
scheme he is of course unable to measure the working of all Forces 
these forces on the basis of past experience. Some of them 
will not come into operation until after the system has been 
established and others which have been in operation in the 
past may be influenced by the establishment of the system. 

The rate of resignation from the service, and the rate of The Rate 
dismissal are both rates which may be seriously affected by drawal 
the introduction of a retirement system. The system may 
prove a very strong factor in retaining men in the service who 
would otherwise have resigned, and consequently the rate of 
retirement will be reduced. If resignations are to yield a 
profit to the fund, and if it has been anticipated that they will 
occur at the old rate, the amount of profit from this source 
may be greatly overestimated, and a deficit may result. The 
conservative actuary therefore would hesitate to estimate for 
the fund the full profit from resignations at the old rate. He 
would either reduce the rate as based on past experience or 
else he would use the data regarding resignations as merely 
indicative of the general trend of resignation in that service, 
and he would adopt a rate from the experience of some other 
fund. The uncertainty of the rate of resignation is, in fact, 
fairly great; and the soundness of the system from the 
actuarial point of view is increased if the fund derives neither 
profit nor loss from resignations. The same general state- 
ments are true regarding dismissals. 

The rate of salary change may also be affected by the in- The Rate 
troduction of an adequate retirement system. Promotions change* 7 
will be more rapid after the establishment of the system and 

345 



RETIREMENT OF PUBLIC EMPLOYEES 



Develop- 
ment of 
Experience 
Rates 



employees will reach the higher positions at earlier ages. The 
actuary would, therefore, have to be cautious in adopting the 
salary scale of a service without a retirement system for that 
service after the retirement system had been established, be 
cause he might find that the benefits were higher than he had 
anticipated and that the increased contributions were not pro- 
portional. This danger would be particularly great if the ben- 
efits were based on some form of terminal salary. 6 

Regarding all the forces which cannot be measured accu- 
rately on the basis of data collected relating to past experience, 
the actuary will generally attempt to secure all available de- 
tailed information that will indicate what is to be expected 
in the future. Regarding the forces which can be accurately 
measured, he will collect all the facts needed for the develop- 
ment of an adequate set of rates. The mortality rate, or the 
death rate as it is sometimes called, for employees in the active 
service is perhaps as typical as any of the rates and is as 
illustrative of their general nature. Roughly speaking, the 
actuary determines for each age the number of employees 
who were in the active service at that age in the period cov- 
ered. This number he refers to as "the number exposed to 
risk," because these were the employees among whom death 
at that age could occur. The actuary then finds how many 
deaths actually did occur among the employees at that age in 
the period studied. By dividing the number of deaths at that 
age by the number exposed to risk at that age, he finds the 
proportion that died, or in other words the death rate for the 
age. Similarly he finds how many were dismissed at that 
age, and gets the rate of dismissal by dividing by the number 
exposed to risk ; he finds how many resigned, and gets the rate 
of resignation by dividing by the number exposed to risk, and 
similarly he gets the rate of disability, the rate of superannua- 
tion retirement and the other rates that are needed. By adding 
together the numbers representing those who left the service 

6 For a more detailed discussion of the objections to the use of the 
salary scale, see page 128. 

346 



Rates 



OPERATION ON ACTUARIAL RESERVE BASIS 

and subtracting it from the number exposed to risk he gets 
the number who survived in the active service at the end of 
the year. The number exposed to risk is therefore a highly- 
important figure and is the basis of many calculations. The 
actuary has to get the various rates for each age, and ordi- 
narily when he speaks, for example, of "the mortality rate 
in the active service," he refers to the whole series of rates 
representing each age at which an employee is in the service. 

The rates as based on the actual figures do not ordinarily Graduating 
progress in a smooth series, and if plotted on cross section 
paper do not form a smooth curve, because the numbers on 
which they are based are sometimes small, and a slight excess 
of deaths at one age and an absence of deaths at the next will 
cause violent changes in the rates as one passes from age to 
age. Clearly these violent changes are not due to violent 
changes in the actions of the law of nature governing mor- 
tality, but are chance errors and are due to the fact that the 
actuary's figures are based on small numbers that permit small 
numerical changes to exert a great influence on the rate. The 
actuary therefore graduates the curve so that it will be 
smooth, by raising some of the abnormally low points and 
lowering some of the abnormally high points until his curve 
reflects what is approximately the fundamental operation of 
the forces at that time. This graduation may be done by the 
use of mechanical instruments and observation or by the appli- 
cation of highly developed mathematical formulae. When it 
is completed it is checked by showing that, had the rates in 
the graduated curve been in operation, the number of deaths 
within any, say, five-year period would have been the same as 
the number that actually did occur in that five-year period. 
The adjusted rates may show, for example, a few more deaths 
at ages 56, 57 and 59 than actually did occur and a few less 
at 55 and 58, but the total for the ages 55 to 59 will be the 
same for the adjusted as for the unadjusted rates. These 
adjusted rates the actuary uses in anticipating the future. 

The actuary next constructs what he calls a service table by 

347 



RETIREMENT OF PUBLIC EMPLOYEES 

Service assuming that, say a hundred thousand men, enter the service 

at the earliest entrance age. By applying the various rates 
of that age to this entering body he finds how many will be 
lost to the service in the first year, and by subtracting the total 
of these losses he gets the number that will survive at the be- 
ginning of the next year. To these survivors he applies the 
rates for their age and again gets losses and survivors; and 
thus he proceeds until the last of the employees pass from 
the service. By taking the number of employees in the service 
at age 2J, according to this service table, and dividing it into 
the number surviving at age 65, he can determine, for ex- 
ample, what proportion of those who are now 27 will probably 
be surviving in the service at 65. This active service table 
ordinarily forms the basis for his computations regarding per- 
sons in the active service. Similar tables are prepared show- 
ing the experience of persons retired on disability benefits and 
on superannuation benefits. In some complicated systems 
which give the employee the right to retire after a certain 
number of years of service more than one active service table 
is required. 
Money After the actuary has worked out the necessary service 

Values tables he combines the rates with the money values in such 

a way that he can determine the premium rates. In this 
branch of work the factor of interest is the dominating one. 
If one has in hand at the present moment one dollar which is 
invested immediately at 4 per cent, interest compounded semi- 
annually, that dollar at the end of seventeen years and a frac- 
tion will have earned a dollar in interest. If, therefore, one 
had a bill of two dollars to pay in seventeen and a fraction 
years from now, he would make sufficient provision for it if 
today he put one dollar in a savings bank that guaranteed him 
4 per cent interest compounded semi-annually. The actuary 
has to figure on the one hand on paying claims year after year 
and on the other hand on receiving premium payments year 
after year. He must therefore combine the interest factor 
with the other factors so that he can deal uniformly with pres- 

348 



OPERATION ON ACTUARIAL RESERVE BASIS 

ent values and eliminate the time factors. The present value 
of a payment to be made in the future is the amount which 
in hand today at the given rate of interest will equal the pay- 
ment on the future day. 

i 

Importance of Devising Economical System of Records. 
The collection of data regarding the forces that determine the 
cost of the system and the installation of an adequate system 
of records so that in the future the necessary facts can be se- 
cured easily and cheaply are two of the principal services which 
the actuary renders at the installation of a system. The cost 
of the future administration of the fund will in a large meas- 
ure depend on the system of records installed at the outset. 
An adequate set of records devised to facilitate actuarial valu- 
ations and to permit of a maximum utilization of modern 
mechanical devices for tabulation will in all probability pay 
the fee for the actuary's services within a comparatively few 
years. An inadequate set of records ill adapted for use in 
connection with mechanical devices for tabulation will be a 
constant source of loss and will doubtless be discarded when a 
real actuarial valuation of the fund is made. It must be con- 
stantly borne in mind that the actuary has to have facts re- 
garding all present employees and all beneficiaries and regard- 
ing some former employees and that all these facts have to be 
combined and recombined in tables to show what actually hap- 
pened. The problem of tabulation is therefore a highly im- 
portant one, and the expense can be markedly reduced by a 
competent and experienced actuary. 

Necessity for Collecting Data for Each System. "Why is 
all this collection of data necessary?" it may be asked. "If 
the actuary can adopt rates from the experience of other 
funds to measure the action of certain forces, why should he 
not adopt rates from other funds to measure all forces, and 
thereby eliminate all the costly tabulation?" These questions 
will occur quickly to the minds of those who are familiar with 

349 



RETIREMENT OF PUBLIC EMPLOYEES 

the supervision of life insurance companies in which certain 
tables of mortality are accepted as standards for certain pur- 
poses in making valuations. Experience has proved, how- 
ever, that this practice is unsafe. The late Henry \Y. Manly, 
the distinguished English actuary, who was among the first to 
develop the application of actuarial science to retirement sys- 
tems, prepared a paper in which he presented a series of tables 
showing the rates used in valuing funds. In the discussion of 
this paper Mr. George King, another actuary, who has also 
won a high reputation in the valuation of retirement funds, 
is reported as having said " that he thought "that Mr. Manly's 
industry and thoroughness might perhaps be a source of dan- 
ger because [the tables he had prepared] would tempt those 
persons who were not so industrious and who had funds of 
this kind to value, to use Mr. Manly's tables. His own ex- 
perience was most emphatically that, although for mortality 

7 Journal of the Institute of Actuaries, Oct., 1903, Vol. 38, p. 168. 

In his own paper on ■■Staff Pension Funds" Mr. King wrote: 

''The statistics of one fund cannot safely be used for another; and 
therefore notwithstanding the excellent work done in this connection 
by Mr. Manly, I deprecate the publication of standard Pension Fund 
tables; and especially of voluminous monetary tables based upon 
them, such as those given to us by him. They are very liable to be 
misleading unless indeed they are used with the most extreme discre- 
tion and modified fully after collation with the actual experience of 
the fund to be valued. It is far better, in the case of each fund, to 
go to the comparatively small trouble of preparing special monetary 
tables suited to its own circumstances. Mr. Manly himself (Journal 
of the Institute of Actuaries, Vol. XXXVI, p. 258) has uttered a most 
emphatic word of warning which should not be overlooked.'' — George 
King on "Staff Pension Funds," Journal of the Institute of Actuaries, 
Vol. 39 (1905), p. 135. 

"Each fund is a law to itself and the law may change from time 
to time, so that it is essential to base the valuation — either explicitly 
or by adjustment — on data derived from the recent experience of the 
fund. While those principles are recognized as fundamental by all 
actuaries experienced in this branch of work, they cannot be too 
strongly emphasized or illustrated, for experience shows that even 
when there is much in common between the occupations and social 
positions of the members of two different funds, it is unsafe to 
assume that the same basis of valuation will apply to both." — Mr. G. 
T. Lidstone in discussing S. J. H. W. Allin, F.I. A. : paper on "Widows' 
and Orphans' Pension Funds," Journal of the Institute of Actuaries, 
Vol. 39, p. 364. 

350 



OPERATION ON ACTUARIAL RESERVE BASIS 

purposes it might be safe to use one experience for another 
fund, yet for pension purposes the funds were so very dif- 
ferent that he did not think that they could find two suffi- 
ciently near for them to apply the same experience to both." 
Mr. Manly himself wrote : "There was a time — many years 
now — when I thought it might be possible to value all these 
funds by standard tables, but I am now convinced that that 
is quite impossible." 8 

Experience has indeed proved abundantly that the number 
of possible variables in a retirement fund is so great that each 
fund is more or less a law unto itself. Today it is doubtful 
if a cautious actuary would attempt to adopt even a mortality 
rate from another experience without collecting statistics of 
mortality in the service covered to make sure that the rate 
was applicable. The English Elementary School Teachers' 
Deferred Annuity Fund has demonstrated, for example, that 
retired school teachers are extremely long-lived, and that the 
mortality rate based on the experience of purchasers of annui- 
ties from the English Post Office system, regarded as a very 
conservative table, did not represent such a long-lived group 
as school teachers proved to be. 9 The teachers' annuities have 
therefore been more expensive than was anticipated. Rates 
based on a group of people of various occupations and social 
classes may be generally said to be inapplicable to a group 
of people of a common occupation and of a common social 
class. It follows, therefore, as a necessary consequence that, 
whenever the nature and extent of the data will permit, the 

8 Journal of the Institute of Actuaries, April, 191 1, Vol. 45, p. 182. 

9 "Looking at Table V, for males, it will be seen that, while the 
actual deaths recorded among the teachers were 1,071, those that 
would have occurred had the mortality of government annuitants pre- 
vailed would have been 2,963 ; and these would have been 2,025 deaths 
had the mortality followed the table recently prepared by the British 
assurance companies. Similarly, in Table VI in the case of female 
teachers, the actual deaths recorded was 872 in number, while those 
expected by the government table were 2,630 and by the British offices 
table 2,397." — First Septennial Actuarial Report on the Assets and 
Liabilities of the Elementary School Teachers' Deferred Annuity 
Fund, British Parliamentary Papers, 1908, Vol. LXXXIII, p. 5. 

351 



RETIREMENT OF PUBLIC EMPLOYEES 

actuary must develop original rates for the fund being valued 
and that when this is impossible he must get such evidence as 
he can and select a rate from the fund which is most nearly 
similar. The actuary dealing with retirement funds must be 
familiar with a wide range of rates and cannot depend on a 
single small group as standards. 

Necessity for Conservative Assumptions. Actuarial science, 
then, as applied to retirement systems, especially as applied 
to the problems involved in their introduction in the first in- 
stance, calls upon the actuary for the exercise of judgment. 
His first duty to all concerned is to be consistently conserva- 
tive regardless of the pressure which will almost inevitably 
be brought upon him by those who want large benefits, es- 
pecially by the older present employees. The older present 
employees, as has already been noted, cannot possibly pay the 
full cost of the benefits they will receive. They will get some- 
thing for nothing. They are interested in securing a large 
benefit and they are not sobered by the cost. Unfortunately 
in this country we have many precedents of retirement sys- 
tems in which large benefits are being paid for a fraction of 
their real cost, systems that are really bankrupt but have not 
yet demonstrated that fact to the public. When the actuary- 
announces his cost figures, everyone concerned is frequently 
more or less stunned and surprised that benefits cost so much 
and the older present employees in all probability will open 
fire on the actuary. He must be wrong. Occasionally in the 
discussion that follows a point may be found at which the 
consensus of opinion among the employees and their friends 
is that the actuary has been over conservative, and therefore 
his work is unreliable. If they had discovered a point at 
which he had been under conservative, their charge of unre- 
liability might be justified. The consistently conservative 
actuary is the reliable actuary. His mistakes create surpluses 
and not deficits. His errors can be corrected by an increase 
in benefits or by a reduction in premiums. The mistakes of 

352 



OPERATION ON ACTUARIAL RESERVE BASIS 

the actuary who is not conservative mean deficits and an ulti- 
mate increase in rates or a decrease in benefits. 

The fact that a certain amount of judgment has to be used 
in selecting the rates and in modifying them to meet antici- 
pated future changes added to the fact that unforeseen 
changes may take place in the future makes it necessary for 
the government under a contributory system to reserve the 
right to change the premium rates. It would of course have 
the right to change them for new entrants even if the right 
were not specifically reserved, but unless the government is 
prepared to guarantee the entire system for all who enter un- 
der it, 10 the rates may have to be changed from time to time 
in respect to present employees. 

Actuarial Valuations of Established Funds 

Necessity for Valuation. A system operated on the actu- 
arial reserve basis never reaches a point at which it can go 
on indefinitely without the services of an actuary. One must 
be retained from time to time to determine the precise condi- 
tion of the fund and if necessary readjust the premium rates 
or the benefits in such a way as to restore the necessary equi- 
librium between assets and liabilities. In large funds the con- 
tinuous employment of an actuary might prove advisable, 
whereas in a smaller fund it would be sufficient to employ one 
periodically. 

The Nature of the Work. Determining the financial condi- 
tion of the fund is called an actuarial valuation. The problem 
is not at all the same as the problem of determining one's own 
private financial condition which in its simplest form consists 
only in balancing what one owes against what one has. In valu- 
ing a pension fund the future has to be forecasted. The actu- 
ary must predict what will happen in order to determine the 

10 For a discussion of the advisability of guaranteeing the system, 
see p. ioo. 

353 



RETIREMENT OF PUBLIC EMPLOYEES 



The 

Actuarial 
Balance 
Sheet 



The New 

Schedule of 
Premiums 
and 
Benefits 



magnitude of the liabilities that have been incurred in respect 
to people now in the service who have certain retirement rights 
provided certain contingencies happen and provided they ful- 
fill certain conditions, and also to determine the magnitude 
of the assets which will accrue to the retirement system from 
the sources of revenue established under the law, which are 
generally contingent. The actuary forecasts the future in 
making the valuation by the same general processes he pur- 
sued in fixing the premium rates in the first instance, namely 
( i ) By determining by analysis the precise factors that affect 
the financial condition of the fund. (2) By determining ex- 
actly how they have acted since the establishment of the fund 
or since the last preceding actuarial valuation. (3) By de- 
veloping rates of probability from this experience and (4) 
By applying these rates, combined with the money values, to 
the persons already in the service to get the financial condition 
of the fund. 

The first product of an actuarial valuation is an actuarial 
balance sheet which contrasts the present value of the liabili- 
ties with the present value of the assets. 11 This present value 
makes due allowance for the difference between a dollar in 
hand and a dollar to be received in the future and the differ- 
ence between a dollar due to be paid today and a dollar due to 
be paid in the future. It eliminates the factors of time and 
interest and makes the statement similar to a personal account 
that relates solely to the present. It shows whether the fund, 
if wound up today, could or could not pay each man exactly 
the true value of his claims without any surplus or deficit. 

The second product of the actuarial valuation is the new 
table of premium rates or the new table of benefits. Under 
an equitable system which grants a fixed benefit the premium 
rates will vary according to the employee's age at entrance, and 
if a large number of men and women are employed the rates 
for the two sexes will be different, and if the employees are 



11 For a definition of present value, see page 348. 

354 



OPERATION ON ACTUARIAL RESERVE BASIS 

divisible into distinct groups or classes according to occu- 
pation, so that the life history of the different groups is dis- 
tinct, the rates for the groups will be different. The reason 
for these differences have been considered at length in the 
Chapter on the Superannuation Benefit, pages 163 to 170, and 
in the Chapter on the Disability Benefit, pages 204 to 206. 

How Often Necessary. "How often is an actuarial valua- 
tion necessary?" is a natural question, and no precise answer 
can be given. It would doubtless depend on the size of the 
fund and the number and character of the variables or forces 
included in the system in such a way as to affect its financial 
stability. Frequent valuations of a small fund would not give 
a sufficient body of data for reliable new rates. Very large 
funds might give sufficient data for annual valuations so that 
they would be under constant actuarial control. Funds in 
which the forces determining cost are mortality of retired 
employees and interest would not require such frequent valu- 
ations as those which permit the stability of the fund to turn 
in part upon such uncertain factors as withdrawal rates and 
salary scales. 

In conclusion it may be said that, with due respect to the 
actuaries, the safer course would appear to be to reduce to a 
minimum the number of factors upon which the financial sta- 
bility of the fund will depend. This course simplifies the 
actuarial work and diminishes the chances of creating a deficit 
for the future to meet. The majority of precedents probably 
favor the more complicated schemes, but frequently these 
schemes have grown largely without deliberate planning, and, 
as has frequently been mentioned, the natural way to develop 
a retirement system is probably the worst way. It results in 
the end in something highly complex, whereas if it were care- 
fully thought out in advance the same general results could 
be produced by something which was comparatively simple. 



CHAPTER XVI 

THE ACTUARIAL DEFICIT CREATED 

WHEN A NEW SYSTEM PROMISES BENEFITS 

TO PRESENT EMPLOYEES FOR PAST SERVICES 

The Origin of the Deficit. Effect of Ignoring Deficit. Methods of 
Financing Deficit. Creating Perpetuity. Payments by Install- 
ments. 

The Origin of the Deficit 

When a system is created that promises benefits to the pres- 
ent employees for services which they have rendered in the 
past, it starts with a large deficit, because obviously no assets 
are already in hand to meet the liabilities thus assumed for 
past services. The whole cost of the retirement allowances 
for the present employee who is already at the retirement age 
is a deficit, since no provision has been made in the past to- 
ward giving him an allowance. The present employee who 
has been in the service but a year occasions only a small deficit, 
namely the present value of the amount that would be re- 
quired to give him the promised allowance in respect to that 
one year. Between the present employee who is about to re- 
tire and the present employee who has just entered the service 
fall the great bulk of the employees. Each creates his deficit 
and the total of these deficits is generally, in proportion to 
the pay roll, a very large sum. 

Effect of Ignoring Deficit 

If the existence of this deficit is ignored and if no special 
provision is made to accumulate assets to meet it, the func 
for a certain number of years will to that extent operate 01 
the assessment or cash disbursement basis. Since compara- 

356 



THE ACTUARIAL DEFICIT 

tively few present employees are already of an age to retire, 
the assessments against the taxpayers immediately following 
the introduction of the system will be small in respect to bene- 
fits for past services. As each successive year adds its in- 
crement to the group already retired, the amount the tax- 
payers will be called upon to pay will increase. Presently a 
maximum point will be reached, after which the annual assess- 
ment will gradually diminish. Deaths among the older bene- 
ficiaries who rendered much of their service prior to the estab- 
lishment of the system will release the fund from heavy pay- 
ments in their behalf, and the beneficiaries who take their 
places will be those who were comparatively young and new 
to the service when the system was adopted. Later a time 
will come when all the employees who were in the service 
when the system was introduced will have passed to the retired 
list. Each year will then witness a rapid reduction in the 
number of beneficiaries, until ultimately some seventy or sev- 
enty-five years after the system was introduced the last pay- 
ments will be made in respect to services which were rendered 
prior to the existence of the system. 

This gradual fall in payments after the maximum and their 
ultimate cessation distinguishes treating the deficit arising in 
respect to past services on the assessment or cash disburse- 
ment basis from treating the entire system on that basis. If 
the entire system is treated on the assessment or cash dis- 
bursement basis, an approximate maximum is reached which 
is never diminished unless the size of the service diminishes 
or unless the system is wound up, whereas if the deficit only 
is thus treated a steady decrease sets in the moment the max- 
imum is reached and ultimately the deficit disappears entirely. 

Two objections may be raised against ignoring the deficit 
for past service and financing the benefits by assessment 
against the taxpayers at the time the benefit payments fall 
due. The method is inequitable as between successive gen- 
erations of taxpayers, and it requires that the whole amount 
be raised as taxes instead of letting part of it be earned as 

357 



RETIREMENT OF PUBLIC EMPLOYEES 

interest. The generation of taxpayers which establishes the 
system includes among its number more who have personally 
benefited from the consumption of these services than any 
succeeding generation will contain, and yet this generation, 
which establishes the system and binds the future generations 
to pay for it, slips out without paying more than a very small 
fraction of the cost. If they paid something to a fund to 
accumulate at interest, the cash payments of each generation 
could of course be reduced, because interest would pay part. 
The reduction of the amount which the taxpayers would be 
called upon to bear would tend to prevent the fund from be- 
coming unpopular with them. 

The actuary in stating the amount of this deficit, it should 
be specifically noted, gives it in terms of present value, that 
is, it is given as an amount which if in hand today would pay 
the costs of benefits for past services as they fall due, pro- 
vided it was invested so as to earn the rate of interest as- 
sumed in the actuarial calculations. If it is not in hand today 
and invested at that rate of interest, it will partake of the 
nature of a mortgage and the taxpayers will not only have 
to pay the principal ultimately, but they will have to pay in- 
terest on the unpaid balance until it is paid. 

Methods of Financing Deficit 

As few government organizations could, even if it were 
deemed advisable, collect the entire amount of the deficit im- 
mediately, other methods of meeting it have to be considered. 
One possible device is to permit it to run on as a perpetuity 
and to have the taxpayers each year pay the interest. Under 
such a system the debt itself is never paid. Under the other 
systems provision is made for discharging the debt on the 
installment plan, much as the man who borrows from a build- 
ing association to construct a house repays on the installment 
plan. Two variations of this plan deserve mention. Under 
the first a uniform fixed payment is made which is applied 
first to paying the interest, and after the interest is paid the 

358 



THE ACTUARIAL DEFICIT 

balance is used to curtail the debt. Under the second a cer- 
tain uniform amount is paid each year toward curtailing the 
debt and in addition a sum is appropriated each year to pay 
the interest on the balance outstanding. Under the first the 
aggregate annual payment is the same each year until the debt 
is paid, whereas under the second the aggregate payment di- 
minishes each year until ultimately the debt is paid by a last 
appropriation of the annual amount paid on the principal. 
The number of years within which the deficit is to be dis- 
charged is of course a matter of judgment or expediency; it 
can be varied at will without affecting the general operation 
of the devices. The larger the periods of course, the smaller 
will be the annual payment. 

Creating Perpetuity. Permitting the deficit to become a 
perpetuity and paying the interest on it annually is an entirely 
feasible method. Bonds of the government would be issued 
to the retirement system for the entire amount of the deficit 
bearing interest at the rate used by the actuaries in determin- 
ing the amount of the deficit. Each year the government 
would have to appropriate the interest for these bonds just 
as it would appropriate interest on any of the other obliga- 
tions. When the time came that the present employees' re- 
tirement allowances would cost more than the interest and 
its earnings, the premiums in behalf of new entrants and their 
accumulations could be invested in these bonds, and the pur- 
chase price thus secured could be utilized in making payments 
to the present employees. The bonds would thus become the 
first investment of the fund, and if the fund were never wound 
up the bonds would never have to be paid, though the govern- 
ment in perpetuity would have to pay interest on them. 

In favor of this device of creating a perpetuity some argu- 
ments can be advanced. The system that creates the deficit 
is introduced because it is believed that it will be of perma- 
nent benefit, that all future generations will gain through the 
resulting improvement of character and efficiency of the pub- 

359 



RETIREMENT OF PUBLIC EMPLOYEES 

lie service. The obligation arises not from any act of omis- 
sion of the generation of taxpayers that established the sys- 
tem, but from the acts of omission of preceding generations 
of taxpayers who acquiesced in the continued existence of the 
old system. The present generation may argue not only that 
they owe no greater payments than the others, but that they 
actually owe less, because the full benefits of an adequate sys- 
tem cannot be reaped at once, but only after it has been in 
operation for some years. It may be further pointed out that 
the amount of interest under such a system is a constant, and 
therefore as the value of taxable property or of the taxable 
base increases, the rate of the levy in respect to this deficit 
diminishes, so that although each successive generation pays 
the same actual amount, the tendency is for each succeeding 
generation to pay a smaller rate, or a smaller percapita tax. 

Against this attempt at justification of the creation of a per- 
petuity it may be urged that next to past generations the imme- 
diate generation is more largely responsible than any other for 
the deficit. It created the system, and it contains a maximum 
number of those who received services from the present em- 
ployees without making any provision to protect the govern- 
ment from the losses which it would sustain in carrying them 
on the active rolls after they are superannuated or disabled. 
The present generation under a retirement system does reap 
a peculiar saving from its establishment. It is relieved of pay- 
ing salaries to the persons who are already superannuated or 
disabled, which was its share under the old system; and by 
establishing a perpetuity it escapes with only the payment 
of interest on the obligation. 

Payments by Installments. The method of paying off the 
deficit in the course of a given number of years is advocated 
by those who believe the present generation is under greater 
obligations to meet it than any other generation upon which 
it can be placed. It contains the largest number of persons 
who benefited from the services in respect to which the deficit 

360 



THE ACTUARIAL DEFICIT 

arises, and the installation of the system relieves this genera- 
tion from paying what would have been its share of the cost 
of the old system of retaining the disabled and the superan- 
nuated on the active rolls. 

If the method of paying off the deficit in a given number 
of years is adopted, the decision will be reached partly on the 
ground of expediency and partly on this ground of justice as 
between successive generations of taxpayers. The latter ground 
may be used as a basis for determining the number of years 
within which the deficit shall be canceled. It may be argued that 
an infant taxpayer who received only a few days' service before 
the introduction of the system might live to be approximately 
a hundred, and thus a hundred years would mark the end of 
the period during which any part of the burden would fall 
on those who were taxpayers at the time services were ren- 
dered. But clearly the period of one hundred years would be 
too long to be fair, because it assumes taxpaying from in- 
fancy and an extreme span of life. Sixty years has been 
adopted for the Liverpool Corporation Superannuation Fund, 
and it seems a reasonable period. After sixty years, more- 
over, most of the employees for whom the deficit has been 
incurred will be no longer living and therefore 60 years may 
be selected on the ground that it terminates the payments 
toward the deficit at approximately the time when those for 
whom it was incurred have passed from the pension rolls. 1 

If the desire is to increase the burden on the present tax- 
payers, the device of the uniform annual payments to curtail 
the principal of the debt with a diminishing payment as the 
interest charge on the unpaid balance would suggest itself. 
The further the taxpayers were removed from the date of the 
adoption of the system, the less they would be called upon to 



1 See "On the Superannuation and Pension Funds of Certain 
Metropolitan Borough Councils, Their Establishment, Administra- 
tion and Actuarial Investigation," by Henry W. Manly and Thomas 
G. Ackland. Journal of the Institute of Actuaries, Vol. 46 (1912), 
P- 327- 

361 



RETIREMENT OF PUBLIC EMPLOYEES 

pay. It would, moreover, be entirely feasible to graduate the 
payments to curtail the principal of the debt in such a way 
that the burden on the present generation would be increased 
and that on the future generation diminished. 

The possible variations are in fact almost innumerable. The 
essential point is to recognize clearly that a deficit exists at 
the start and that some adequate means of meeting it should 
be adopted at the time the system is established. 



CHAPTER XVII 

SYSTEMS TOO SMALL TO BE CONDUCTED ON 
ACTUARIAL RESERVE BASIS 

Scope for Law of Averages Required. Methods of Securing Num- 
bers. Centralized Systems. Private Insurance Organizations. 

Scope for Law of Averages Required 

To permit of the maintenance of a fund on the actuarial Why 
reserve basis the number of employees must be sufficiently 
large to give full scope to the operation of the law of aver- 
ages. It is on this law that the actuaries depend for the suc- 
cess of their calculations. They cannot tell of course how 
long any one individual will live, but they can predict with 
a striking degree of accuracy how many will die each year 
out of any large group. They can determine the rate at which 
death will strike, but they cannot foretell who will be the vic- 
tims. When only a few employees are involved the methods 
of the actuary become inapplicable. If the attempt is made, 
for example, to apply rates of death to the small numbers ex- 
posed to risk, for the sake of determining the number of deaths 
to be expected, the results will be fractions of a death at the 
different ages. Clearly the actuary cannot deal with such 
small numbers, because the deaths will occur as units, and 
under a life insurance provision, if one or two deaths oc- 
curred at very early ages, the system would be in difficulty, 
and on the other hand under an annuity scheme, if a few bene- 
ficiaries should live to extreme old age they would bankrupt 
the system. 

Exactly how large a number would be required to permit Number 
of the development of a system on the actuarial basis would ecessar y 
depend somewhat upon the nature of the system and some- 

363 



RETIREMENT OF PUBLIC EMPLOYEES 



Advantages 
of Cen- 
tralized 
Systems 



what upon the character of the service. A system involving 
only the contingency of death, which is the most certain and 
uniform, could probably be safely established on the actuarial 
reserve basis for a smaller group than could a system involv- 
ing death, disability withdrawal and the salary scale. A small 
homogeneous staff with fairly uniform service experience, and 
drawn from approximately the same social group in the popu- 
lation, could be provided for more safely in a fund than could 
a somewhat larger group which included employees who dif- 
fered widely in respect to salaries, occupations, and social 
groups. Everyone who is familiar with the actuarial rates 
that have been developed for different funds must be im- 
pressed with the fact that even the death rates vary ma- 
terially. This fact is strikingly brought out in the actuarial 
report on the numerous New York City funds, in valuing 
which Mr. Buck found it necessary to use different death rates 
for the several branches of the city service because of those 
differences. 1 The other rates would be even more seriously 
affected, and a salary scale for a non-homogeneous small serv- 
ice would be a very uncertain factor. Because of the number 
of factors involved, the exact point of safety cannot be put 
at a certain uniform number. The advice of the actuary who 
has had an opportunity to study the detailed facts of the serv- 
ice must be taken and the point would be a very important one 
for consideration in any service having less than a thousand 
employees. 

Methods of Securing Numbers 

Centralised Systems. The difficulty of getting a sufficient 
body of employees to permit of the establishment of a stable 
reserve fund can generally be overcome by forming cen- 
tralized systems. A state, for example, could found and oper- 
ate a system in which all local governments within the state 
would be participants, or in which any local government desir- 

1 Report on the Pension Funds of the City of New York, Part II, by 
Mr. George B. Buck, New York, 1916. 

3 6 4 



SMALL SYSTEMS 

ing to provide a retirement system would be a participant. 
The establishment of a single centralized system has certain 
marked advantages. It gives a broad foundation for the 
actuarial computations upon which the soundness of the sys- 
tem depends. It reduces the expense of administering the 
system, and insures better administration, because the state 
can employ a few high-grade people who will devote most 
of their time to the required work, whereas if each locality 
attempts to do it for itself more people will be concerned with 
the administration of the systems, but few of them will de- 
vote enough of their time to it to become properly qualified. 
Under a state system provision can be made, too, for free- 
dom of movement from one locality to another or from one 
government organization to another. The principal advan- 
tage, however, is that the centralized state system permits 
the small local government unit to have an efficient system, 
cheaply administered, whereas by itself it would have to 
adopt an inferior device. The ideal solution for small services 
is therefore to get the central government to establish a gen- 
eral system common to all. 

A centralized system of which the various local govern- Equality 
ments are members raises a new problem, that of dealing ^L^ 6 
equitably with each unit. In many respects the problem re- Participants 
sembles that of preserving equality of return among indi- 
vidual employees, which has already been considered under 
the heading the amount of the benefit in its relationship to 
salary in the chapters on the superannuation benefit (page 
126) and on the disability benefit (page 194). If the cen- 
tralized system is operated on the so-called savings bank prin- 
ciple, and if the amount of superannuation benefit is made 
dependent on the amount of the accumulated contributions 
paid by the employee or on his behalf, and if the disability 
benefit is an insurance of a fixed sum, or if an amount which 
a fixed premium will purchase, it would hardly seem as if 
serious friction could arise between the units as to the fair- 
ness of the device. If it developed that the disability rates 

365 



RETIREMENT OF PUBLIC EMPLOYEES 

differed in communities of different sizes, it might be feasible 
to establish separate premium rates for each of the several 
classes into which the communities might be divided in respect 
to size; but the system could easily be made perfectly equita- 
ble. Serious differences might easily arise, however, as to the 
amount of the benefits to be provided and the division of the 
cost. It would seem as if such difficulties might be overcome 
by permitting the local units a considerable degree of freedom 
in determining the amounts which should be contributed by 
their individual employees and by the employing local gov- 
ernment in the employees' behalf. The real function of the 
state in establishing the system might well be regarded merely 
as serving as an insurance carrier, bringing together all the 
units in a single organization large enough to give scope to 
the law of averages and to permit the sale of annuities and of 
insurance against disability. The minimum state contribution 
would be probably the cost of administering the system. 
Whether the state should do more is probably a question for 
local decision; but if it attempted no more it would avoid the 
difficult problem of equality of treatment for large and small 
communities. 

An actuarially complicated system with forfeitures in event 
of withdrawals, and benefits based on salary, would in all 
probability give rise to friction between the units after the 
working of the system became well understood. It is hardly 
to be assumed that the salary scale for small communities 
would in the least resemble the salary scale for large cities, 
and doubtless the withdrawal rates would be very different 
for different types of communities. The time would probably 
come when the citizens of certain classes of communities and 
their employees would oppose the system on the ground that 
they were paying more than the cost of the benefits they 
were receiving and that certain other communities were get- 
ting more than they paid for. Such a system would intro- 
duce as between the units all the elements of inequality that 
it permits as between individual members. 

366 



SMALL SYSTEMS 



Private Insurance Organizations. If the small government Necessity 
organization finds it impossible to induce some larger central for Servlce 
government organization to perform the service of bringing 
together enough local units to permit of the sale of superan- 
nuation annuities and disability insurances it cannot undertake 
their sale itself, but must turn to some other agency which has 
a sufficiently large number of clients to permit it to deal safely 
in these benefits. 2 The local government can itself provide 
for the accumulation of funds at interest because that is a mere 
savings bank device, the safety of which does not depend on 
numbers, but it has to pay over the accumulations to a larger 
organization when annuities become due, as the payment of an- 
nuities requires scope for the operation of the law of averages. 

The natural agency for the small government unit to select Old Age 
is an insurance company. If it chooses itself to accumulate 
the funds, it would simply take the entire amount to the ac- 
count of an employee when he retired and use it for the pur- 
chase from the company of an annuity. Such an arrangement 
would, of course, protect against old age only. It is perhaps 
questionable whether at this time a small local government 
could find an insurance company which would undertake to in- 
sure the employees against permanent disability not occurring 
in the actual performance of duty for an annuity payable 
throughout life under a policy which the company could not 
cancel. The dangers of fraud would be so great that the com- 
panies would hesitate to sell such policies, and the government 
selling them itself through its own retirement system has to 
exercise great care. 



Annuities 



2 "A small fund cannot undertake the liability of paying life annui- 
ties nor fixed sums payable at death, because the number of lives 
concerned is not large enough to eliminate the uncertainty of the lia- 
bility in respect of each. Consequently, where the school institutes 
a fund which it retains in its own management, it must, unless it is 
very wealthy, avoid these uncertainties and restrict the fund to the 
character of a Savings Bank." — Departmental Committee on The 
Superannuation of Teachers : Report of the Committee on the Second 
Reference, British Parliamentaiy Papers, London (1914), Vol. XXV, 
p. 10. 



3fy 



RETIREMENT OF PUBLIC EMPLOYEES 



Death 
Benefit 



The 

Federated 
Universities' 
Scheme 



If the local government desired to protect its employees 
against death by a special benefit over and above the mere 
return of the contributions, it could also purchase from the 
company insurance on the life of the employee either for the 
whole of life or until such time as he reached the retirement 
age and entered upon his annuity. The latter policy would of 
course be very much cheaper than the former, as has been 
indicated in the chapter on death in the active service from 
causes not arising in the actual performance of duty (page 
254), and it probably better meets the needs of the em- 
ployees, since more insurance can be carried when most needed 
for the same premium. 

If the local government preferred not to undertake the 
accumulation of any funds itself it could adopt a system sim- 
ilar to that recently established for the Federated Universi- 
ties of England. 3 In this scheme each teacher within the scope 
of the system is insured with a selected life insurance com- 
pany and the premiums on this insurance are paid annually. 
The amount of the premium under such a system could of 
course be paid entirely by the government, entirely by the em- 
ployee, or by the two combined as the founders of the system 
may prefer. In the Universities' scheme three types of poli- 
cies are offered : 



1. Simple endowment insurance with profits or divi- 
dends. Under this policy the beneficiaries receive the 
face of the policy on retirement, or it is paid to his estate 
in the event of his death before retirement. 

2. A deferred annuity policy with a return of pre- 
miums in event of death before the retirement age. 

3. A deferred annuity policy without any return of 
contributions in event of death before the retirement age. 



3 See Reports of the Advisory Committee on the Distribution of 
Exchequer Grants to Universities and Colleges in England, British 
Parliamentary Papers, Second Report (1912), Vol. XXII; Third 
Report (1913), Vol. XXI. 

368 



SMALL SYSTEMS 

The third possibility gives the maximum amount for old 
age alone and may be called the single man's policy. The 
first is the policy which would be selected with the man with 
many dependents, though of course it yields a far smaller an- 
nual return than either of the others. All three policies are 
designed to mature at age 60. 

Under such a system, if the employee resigns or is dismissed 
he can be given either the cash surrender value or the policy 
itself. In the English Universities' system if he leaves one 
university to enter another the policy is merely transferred 
and the new employing university assumes the premium pay- 
ments that the former university had been paying. One of 
the grounds for adopting the system was to facilitate transfer 
from one university to another. 

The Carnegie Foundation for the Advancement of Teach- 
ing is now considering offering to American universities a 
similar device, in which it will take the place of the private 
insurance companies, rendering the service without charge for 
administration and basing its rates on mortality tables drawn 
from the experience of the particular classes to which it ap- 
plies. 4 

Against insurance with private companies as a device for Objections 
providing a retirement system for public employees, four prin- insurance 
cipal objections have been urged: (1) If the government 
compels insurance, it should guarantee the soundness of the 
system, and the government could hardly guarantee the sound- 
ness of a private company. (2) Private companies are some- 
times conducted for profit. (3) Even in mutual companies 
the cost of doing business is an important factor. This objec- 
tion is overcome in part if the private companies give a re- 
duced rate in recognition of the fact that they are put to no 
expense for agents to secure the business and that the cost 

4 See "A Comprehensive Plan of Insurance and Annuities for Col- 
lege Teachers," by Henry S. Pritchett, President of the Carnegie 
Foundation, Bui. 9 of the Carnegie Foundation for the Advancement 
of Teaching, New York, 1916. 

369 



RETIREMENT OF PUBLIC EMPLOYEES 

of collecting the premiums is comparatively low. (4) The de- 
vice does not lend itself to the development of satisfactory 
provisions against disability at early ages. This fourth ob- 
jection is perhaps the most difficult one to overcome, because 
at the present time disability insurance is dangerous, especially 
where the insurer has no administration control over the in- 
sured. 

In spite of these objections resort to private companies 
seems the only feasible device if the small unit is unable to 
combine with other small units in rendering the service for 
itself. 






CHAPTER XVIII 

CERTAIN COMMON PRACTICES IN FINANCING A 
FUND THAT ARE OBJECTIONABLE 



In retirement legislation provisions are frequently encoun- The 

Praci 
Described 



tered that direct that all or a certain proportion of the revenue ] 



from certain specified sources shall be paid to the retirement 
fund. In some instances these sources of revenue have no 
connection whatsoever with the branch of the service for 
which the retirement system is established. The Teachers' 
Retirement Fund of the City of New York, for example, is 
given a certain percentage of the excise moneys, though ob- 
viously no relationship exists between the teaching profession 
and the amount of the excise tax. In other cases the revenues 
specially appropriated are directly affected by the administra- 
tion of the service for which they are appropriated. Among 
such provisions may be mentioned payment into the police 
fund of fines levied against police officers for breaches of dis- 
cipline, of a certain proportion of all fines levied on members 
of the general public for drunkenness or for offences where 
the police were the informers, and of certain fees for the per- 
formance of police functions. Proceeds from the sale of con- 
demned property and unexpended balances from appropria- 
tions are other provisions of this character. 

The inclusion of such provisions is contrary to a sound pub- The 
lie policy, because ( i ) they work against the maintenance of ° b {j;e tlon9 
the fund on a proper actuarial reserve basis, (2) they prevent Practices 
the exact cost of the retirement system from being known and 
appreciated by the taxpayer and (3) they may lead to im- 
proper administration of the service. 

The essence of the actuarial reserve system is to pay into 

371 



RETIREMENT OF PUBLIC EMPLOYEES 

the fund each year the exact sum necessary to make assets 
meet liabilities. The amount of the revenue to be derived 
from these special revenues bears no relation to the liabilities 
that are incurred. A system therefore cannot be placed on a 
sound financial basis by the simple device of providing certain 
sources of revenue at the outset. The sums required will have 
to be considered each year and will have to be measured by the 
liabilities incurred in that year. It would of course be possible 
to provide these special sources of revenue and then annually 
to appropriate for any deficit, but the simpler device would 
be to pay the money from these sources into the general treas- 
ury and to appropriate the entire sum for the retirement sys- 
tem in one clear-cut item. 

Anything that disguises the cost of the retirement benefits 
and tends to hide some of it under permanent appropria- 
tions is objectionable, because it increases the danger that 
the retirement system may be utilized for exploiting the public 
treasury. One of the chief merits of the actuarial reserve 
system is that it keeps the matter of cost constantly in the eyes 
of the employees and of the public. This advantage is very 
much reduced if any part of the required sum is a permanent 
annual appropriation from a fixed source. Under such a 
system the annual appropriation required to keep the system 
solvent, the one that appears in the appropriation bills, where 
it is subject to review and criticism, becomes only a part of 
the true cost. The danger of the establishment of a "pension 
graft" in retirement legislation can only be met by never per- 
mitting true cost to be in any way hidden. 

Particularly to be condemned are any provisions that can 
possibly permit of the necessities of the retirement fund in- 
fluencing the public servant in the performance of his duty. 
Permitting the pension fund, for example, to derive a profit 
from an arrest and conviction is so palpably improper that one 
wonders how such a provision could ever have passed a body 
that supposedly represented the interests of the general pub- 
lic. Allowing the fund to profit from the sale of condemned 

372 






OBJECTIONABLE COMMON PRACTICES 

property may result in large bills for equipment and supplies 
which are in fact indirect contributions to the retirement sys- 
tem. The unexpended balance of appropriations is an equally 
objectionable source of revenue. Whenever the fund is in 
difficulties the temptation is to pad the estimates and to cut 
down the service to the public so that the unexpended balance 
will help solve the financial problem of the fund. The revenue 
from fines levied against the employees themselves is perhaps 
less open to objection on this score, but even in this instance 
cases of serious abuse can be easily imagined. 

The one safe rule is to have all the appropriations made by The Rule 
the government for the fund appear in a single item, sup- 
ported by an appropriate schedule showing the detailed facts 
regarding the fund. Only in this way can it be properly safe- 
guarded against the abuses to which it is peculiarly subject. 



CHAPTER XIX 

PROTECTING THE PUBLIC FROM FINANCIAL IN- 
DISCRETION OF RETIRED EMPLOYEES 

Necessity for Protection. General Provisions for Protection. Pay- 
ment in Annuities : Funds Free From Attachment. Exception 
in Case of Resignation and Dismissal. Exception in Case of 
Large Annuities. Exception in Case of Death Benefits. Borrow- 
ing from Fund. 

Necessity for Protection 

One of the principal objects sought by the public in estab- 
lishing a retirement system is to prevent employees properly 
retired because of advanced age or disability, — and to a cer- 
tain extent their dependents, — from becoming public charges. 
One of the reasons why a retirement system is necessary to 
accomplish this object is that in many cases the nature of the 
public employee's work is such that he does not develop busi- 
ness acumen in the matter of investments and that during the 
active years of life he does not have the opportunity to gain 
experience in working with his own money. This absence of 
experience continues of course throughout life; and if the 
main object of the public in establishing a system is to be 
realized, steps must be taken to prevent the employee, unfa- 
miliar with business matters and investment, from losing the 
accumulations of his working years and becoming at the end 
a dependent upon public or private charity. 

General Provisions for Protection 

Payments in Annuities: Funds Free From Attachment. 
This object of safeguarding the public from unwise manage- 
ment on the part of the beneficiary is generally secured by 
providing : ( I ) that on superannuation or disability retirement 

374 



FINANCIAL INDISCRETION OF EMPLOYEES 

the employee can take his benefit only in the form of an 
annuity and not in a lump sum; x and (2) that the employee's 



1 "The Committee have been advised that the only possible method 
of securing the benefit against such risks as would arise, for instance, 
on the insolvency of the member is the creation of what is known 
as a 'discretionary trust' whereby the Institution can in its discretion 
award the benefits to the member or his wife or any of them. Of 
course in the great majority of cases the Institution will exercise its 
discretion by giving the benefit directly to the member, but in a scheme 
of this magnitude it is necessary to provide for all contingencies. 
Thus the discretionary trust will also be useful in cases of mental 
breakdown. In such cases where the member may not be in a condi- 
tion to manage his own affairs, it is important that the Institution 
should be able to administer the fund promptly and effectively in the 
best interests of the beneficiary. For similar reasons it is necessary 
that the policies should be held by the Institution, in order to guard 
against the risk of premature dissipation the benefit by mortgage or 
early sale." — Third Advisory Committee on Distribution of Ex- 
chequer Grants, British Parliamentary Papers, 1913, Vol. XXVI, p. 4. 

"Annuities only should be used in making payments for any cause 
to the beneficiaries of the retirement system. As a venture in social 
insurance the scheme must have due regard for the protection of 
the beneficiary against old age and dependency. Payments of the 
total amount, in the form of a lump sum representing the present 
worth of the claims of the beneficiary are highly objectionable, because 
there is danger, and in many cases even probability, that the money 
will be lost either through unwise investments or unwise expenditures 
of one kind or another. However able some may be to take care of 
their own money, the state must protect against losing their savings 
those who are less capable of making investments. The principle 
of annual distributions, paid say in monthly or quarterly installments 
should be applied both to the accumulated savings of the teacher and 
to the pension added by the public. When a teacher has served long 
enough to become a risk on the fund, payments after withdrawal for 
any cause should be in terms of annual amounts certain to continue 
at least until the death of the beneficiary." — "The Teacher and Old 
Age," by C. A. Prosser and W. I. Hamilton, Houghton Mifflin Com- 
pany, Boston (1913), p. 44. 

The Departmental Committee on the Superannuation of Teachers 
(Report on the Second reference, British Parliamentary Papers 
(1914), Vol. 25, p. 16), said: 

"Thirdly, they [existing retirement systems] are greatly deficient in 
the means which they adopt for protecting thriftless teachers against 
themselves. In most of the systems the teachers can realize (though 
often at a great sacrifice) the money which, according to the inten- 
tion of the system, should be left to accumulate until his old age. In 
many of the systems he can do this merely by resigning his post; 
and he can then either take out the money standing to his credit in a 
school provident fund, or get into his own possession the insurance 

375 



RETIREMENT OF PUBLIC EMPLOYEES 

rights under the system are unassignable and cannot be at- 
tached. In some cases, prevention of assignment and attach- 
ment have been attained by providing for the payment of 
benefits to trustees under what is sometimes termed a spend- 
thrift or discretionary trust. 

Commuta- Exception in Case of Resignation and Dismissal. In some 

tionof systems, "commutation of pensions," as it is called, has been 

permitted and the employees have been able, if they so choose, 
to take the entire present value of their benefits in one lump 
sum. The weight of the evidence seems, however, to be 
against the practice, because in many cases it has resulted in 
loss. It is, however, the general practice in the event of vol- 
untary resignation or of dismissal, especially in the case of em- 
ployees withdrawing in the early years of life or in the early 
years of service, to make a cash payment that severs all con- 
nection between the employee and the system and this seems 
the wiser course. If, however, the employee resigns or is dis- 
missed after reaching fairly advanced age, it might prove ad- 
visable to make all the payments in the form of annuities, with 
payments to begin at once or with payments to begin when 
the employee reaches the minimum superannuation age. The 
public would thus be protected against the dissipation of the 
accumulation, and to a certain extent the objections against 
benefits in event of withdrawal, that it places a cash premium 
on resignation, would be overcome. 

Exception in Case of Large Annuities. If any one em- 
ployee is entitled to an exceptionally large benefit, the regula- 
tions of the system might well provide that he may be re- 
quired to take, in lieu of part of it, the equivalent present value 

policies which have been taken out for time and which have a certain 
surrender value. Without some community of action and possibly 
some legislation, it is difficult to prevent this power being placed in 
the hands of the members of these pension systems; but, neverthe- 
less, it is a great defect in a pension system which is designed to fur- 
nish a means of subsistence in a teacher's old age that the teacher 
should be enabled to forestall the benefits and apply them to meet his 
difficulties before old age is upon him." 

376 



FINANCIAL INDISCRETION OF EMPLOYEES 

of that part either in a lump sum or in a certain fixed number 
of annual payments, and that the balance be paid as an an- 
nuity. Very large annuities on a single life may constitute an 
element of danger to the fund, because generally the number 
of employees drawing such annuities is not large enough to 
give the law of averages an opportunity to work, and if the 
one or two employees receiving the large annuities should hap- 
pen to live to extreme old age, the payments made to them 
might constitute a serious drain on the fund. The present value 
of part of their annuity would be the exact value of that part 
figured on the basis that the man will live, roughly speaking, 
the average number of years. If he lives longer than the aver- 
age he would have profited from the annuity, whereas if he 
lived only a short period, he or those who are the beneficiaries 
of his estate have profited from the payment of the lump sum. 2 
In some systems, this danger from a few very large annui- 
ties has been overcome by placing a maximum limitation on 
the amount of the benefits. If the system is independent of 
salary, or is directly dependent on salary, this limitation gen- 
erally takes the form of a direct provision that the benefit 
shall not exceed so much. Under a system directly related to 
salary, the natural provision would be that the portion of salary 
over and above a certain maximum shall not be subject to de- 
ductions. In the system directly dependent on salary, the 
establishment of a maximum limitation may tend to offset any 
injustice to the lower paid men, and may even go so far as 
to make the few men who rise to the top pay relatively more 
for their benefits than any other class, but this inequality may 
be overcome in a contributory or partially contributory system 
by placing a maximum limitation on the amount of salary that 
shall be subject to deductions. 

Exception in Case of Death Benefits. Another case in 
which lump sum payments may be preferable to annuities 

2 See "Fundamental Principles of Pension Funds," by J. J. Mc- 
Laughlan, "Transactions of the Faculty of Actuaries" (1908-1909), 
p. 221. 

377 



RETIREMENT OF PUBLIC EMPLOYEES 

arises when an employee dies, and the amount due him under 
the system is so small that it will not purchase an annuity of 
any size for the widow and children. More good can fre- 
quently be done in such instances by making the whole amount 
available at once to keep the family together until readjust- 
ments can be made, for example, until some of the children 
can assist in the support or until the mother can find employ- 
ment. 3 As was discussed at length in Chapter VIII in regard 
to a death benefit, the main principle seems to be to preserve 
flexibility and to permit the employee by will, if he so desires, 
to determine how the benefits shall be applied. 

Borrowing from Fund 

Without Under a wholly or partly contributory system, arguments 

are sometimes advanced for some arrangements whereby the 
employee can borrow against his interest in the system in 
event of illness or other misfortune, just as under a modern 
life insurance policy the insured may borrow a certain part 
of the legal reserve by paying interest on it. The force of the 
arguments in favor of such a provision are obvious, but they 

3 The president of the customs and annuity benevolent fund gave 
the following testimony before the Commission on Civil Service 
Superannuation (British Parliamentary Papers, 1903, Vol. XXXIII, 

p. 114): 

3197. "Then in your opinion, from the point of view of the deduc- 
tion, is it better for her [the widow], to have the annuity or to have 
the chance of one-third of the capital sum? — I think it is better not 
to have the annuity and we had at one time a rule that one-third 
portion should be sunk in an annuity for the widow, and I was myself 
the means of getting that knocked on the head." 

3198. "Why? Would you give me your reasons? — Well, my reason 
was that in many cases the widow did not deserve it, and in other 
cases it was found to be much less for the advantage of the family 
that the widow should have a small annuity, which would be generally 
very small, than that there should be a lump sum of money available 
for putting out the children and putting them into the way of earning 
money for themselves. On the whole, the benefit to the family was 
I considered very much greater and as a matter of fact it is so found, 
because any man, if he pleases, can say, 'Let one-third of my insur- 
ance be sunk in an annuity for my widow.' He is not prohibited from 
doing it if he thinks best, but nobody does think it best." 

378 



FINANCIAL INDISCRETION OF EMPLOYEES 

are very much weakened if the service regulations governing 
sick leave are broadly conceived as a part of the system, so 
that the salary of the employee is still available for the family 
in case he himself is ill. The principal catastrophe which 
would properly justify a loan secured by the reserve under 
the system would thus be provided for without resort to so 
doubtful an expedient. 

The expedient is of doubtful wisdom because its introduc- 
tion might defeat the principal objects of the government and 
of the public in establishing the system. In the absence of a 
compulsory retirement age, the employee whose accumulations 
under the system had been heavily borrowed against to meet 
emergencies would have no means of purchasing a retirement 
allowance and would therefore be continued in the active serv- 
ice by naturally sympathetic administrators regardless of the 
kind of work he might be doing. If a compulsory retirement 
age were included in the system, he would be turned out to 
be supported by public or private charity. The expedient 
might lead, moreover, to grave abuse by some employees who 
would resort to fraud to obtain immediate possession of their 
funds. Any machinery to prevent fraud would have to be 
fairly elaborate and expensive and would require more or less 
minute examination into the personal affairs of the applicants. 

If such a device is to be introduced, it would seem advisable 
to place strict limitations on the amount that can be borrowed, 
or perhaps better to limit borrowing to the amount by which 
the accumulation exceeds a certain minimum. The wiser 
course, however, would appear to be to regard meeting of 
these temporary emergencies as being beyond the scope of the 
retirement system, and to safeguard the retirement system so 
that it will provide for the main dangers which it was created 
to meet. 

Borrowing from the fund on security which would be re- With 
garded as satisfactory by a conservative financial institution 
is another matter that deserves mention. The suggestion has 
been nr.Je that members should have the privilege of borrow- 

379 



Security 



RETIREMENT OF PUBLIC EMPLOYEES 

ing from the fund at the rate of interest the fund is earning, 
if they give proper security entirely independent of their equity 
in the retirement system itself. Their equity would not be 
impaired unless they failed to repay the loan and the security 
deposited proved of insufficient value to cover it. If a member 
desired to buy a house, for example, and had saved enough 
entirely outside the fund to make a reasonable initial payment 
on it, the proposal is that he should have the privilege of bor- 
rowing the balance of the purchase price from the fund by 
giving it a first mortgage on the house and that he should pay 
on the loan that rate of interest at which the fund was placing 
its money at the time. To some it appears unjust that the 
employees shall be compelled to invest in a fund paying a 
relatively low rate of interest, and then have to borrow on 
good commercial security at a higher rate. A strong argu- 
ment can, in fact, be advanced for having the assets of the 
fund invested in such a way that, other things being equal, 
they advance the interests of the employees as a class. If the 
extra cost of investing the money in security offered by indi- 
vidual members is borne by the member concerned, the sug- 
gestion seems to deserve most careful consideration. 



CHAPTER XX 
CONCLUSIONS 

Scope of the Chapter. A Retirement System Necessary. No Model 
System Universally Applicable. System Must Be Applicable to 
Future Entrants. Benefits Part of Compensation for Future En- 
trants. Benefits Must Meet Employees' Needs. The Contingencies 
to Be Covered. The Conditions Upon Which Benefits Are to Be 
Granted. Benefits to Be Granted as Rights. The Conditions of 
the Superannuation Retirement Benefit. Compulsory Retirement 
Provision Necessary. A Permissive Superannuation Age Below 
the Compulsory Age. Superannuation Conditions to Be Based on 
Age. The Exact Ages to Be Selected. The Conditions of the Dis- 
ability Benefit. The Amount of Benefit: Not to Be Discretionary. 
In Relation to Salary. The Amount of Superannuation Bene- 
fits in Relation to Economic Need. The Amount of the Dis- 
ability Benefit. The Amount of the Withdrawal Benefit. The 
Amount of the Benefit : Death in the Active Service. Amount of 
Benefits: Death After Retirement. Amount of Benefits: Death or 
Disability in Actual Performance of Duty. The Cost of a Re- 
tirement System. Distribution of Cost Among Individuals. The 
Division of Cost Between Government and Employees. Indirect 
Contributions of Government. The Organization and Management 
of Fund. The Actuarial Fund Preferred. Necessary Safeguards. 
An Actuary Required. Treatment of Small Services. Indirect 
Appropriations Undesirable. Protecting System from Financial 
Indiscretion of Employees. The Present Employees. Six Differ- 
ences Between Present Employees and Future Entrants. Present 
Employees Must Be Specially Provided for. Different Classes of 
Present Employees. Benefits for Past Services, — Employees Re- 
tired Immediately. Benefits in Respect to Past Service, — Em- 
ployees Continued in Active Service. Benefits for Future Services 
of Present Employees. The Actuarial Deficit on Creating a System. 

The Scope of the Chapter. In dealing with a subject such Conclusions 
as this one of retirement systems, that involves many contro- M " J e on * e 
versial points and has only within a comparatively few years important 
been made the subject of really scientific study, a writer natu- 
rally feels some reluctance in preparing a chapter entitled 
"Conclusions." If he were to confine himself to stating as con- 
clusions only such points as have been established beyond 

33i 



RETIREMENT OF PUBLIC EMPLOYEES 



Soundness 

of Theory 

Given 

Greater 

Weight 

Than 

Precedents 



question, it is doubtful if he could write much, if anything; 
yet in this day of many books and many problems he has to 
recognize as legitimate the demand for a reasonably brief 
statement of fairly definite conclusions on all the more im- 
portant points at issue. To prepare such conclusions he is 
forced to abandon as his ideal an unbiased, academic attitude, 
and to take his position on one side or the other of each con- 
troversy. Conclusions regarding such a subject are neces- 
sarily in a large measure personal. No one realizes more 
fully than the writer, moreover, that retirement systems are 
in their infancy, and therefore he has no desire to be dog- 
matic. For the same reason, he is far more inclined to give 
weight to soundness of theory than to preponderance of 
precedent. Since so many existing retirement systems, both 
public and private, are financially unsound, he would prefer 
to face the charge of relying too much on theoretical analysis 
than that of giving too great weight to precedents. From the 
general point of view thus indicated, the attempt is made in 
the remaining pages to indicate with reasonable brevity what 
seems to be the more promising course to pursue in dealing 
with each of the more important points involved in the prob- 
lem of retirement legislation. A brief statement of the rea- 
sons which seem to indicate the wisdom of that course is given 
so that the reader who has only time for the conclusions can 
have some basis for judging of their fairness. 



Permanency 
of Tenure 
Necessary 



A Retirement System Necessary. In most branches of the 
public service, reasonable permanency of tenure is necessary 
if suitable men are to be attracted by the positions offered and 
induced to remain in the employment of the government 
throughout their active careers, becoming constantly more ex- 
perienced and more valuable. The case in favor of perma- 
nency tenure, whether it be considered from the point of view 
of the public, of the government or of the employees, is so 
obvious and so overwhelming that it is entirely unnecessary to 
prepare a statement of the grounds for reaching the con- 

382 



CONCLUSIONS 



elusion that in most branches of the public service it is im- 
perative. 

The laws of nature make superannuation flow inevitably 
from permanency of tenure. To perhaps a lesser degree na- 
ture may be responsible for these cases in which disease or 
accident robs a man of his efficiency while he is yet too young 
to be classed as superannuated. Much can probably be done 
toward preventing accident and disease and even toward de- 
laying the onset of old age, but for practical purposes at the 
present time it is safe to say that both superannuation and 
disability can be regarded as the inevitable accompaniments 
of permanency of tenure. 

The power of dismissal, unaccompanied by power to grant 
a retirement allowance, is not generally exercised in case an 
employee loses his efficiency because of advancing age, acci- 
dent or disease. The responsible administrative officers have 
no financial interest in the product of their office and have no 
particular incentive to dismiss men because of loss of effi- 
ciency. To exercise the natural instincts of human kindness 
in retaining the superannuated and the disabled on the active 
rolls, so long as they are able to fulfill the minimum attend- 
ance requirements costs the administrators nothing, and pro- 
tects them from attack from the employee's friends. The 
unwritten law of the service, the unwritten terms of the con- 
tract of employment, therefore, become permanency of tenure 
so long as the employee is able to fulfill the minimum at- 
tendance requirements. 

In the absence of an adequate retirement system, most pub- 
lic services affording permanency of tenure operate on a quasi- 
benefit system, giving to the superannuated or the disabled 
employee full salary at the highest rate he has earned, pro- 
vided he can come to office or can be brought to office, whereas 
it will give him nothing whatsoever if the accident or the dis- 
ease from which he suffers prevents his attendance upon his 
duties. The question of an extravagant benefit or of no bene- 
fit whatsoever turns therefore not on the employee's efficiency 

383 



Superannua- 
tion and 
Disability 
Accompani- 
ments of 
Permanent 
Tenure 



Superannu- 
ated and 
Disabled 
Retained 
on the 
Active Roll 



RETIREMENT OF PUBLIC EMPLOYEES 



Retention of 
Superannu- 
ated and 
Disabled on 
the Active 
Roll Un- 
economic 



The Only 
Remedy 
for the 
Government 



nor on the service which he has rendered in the past; but 
merely on whether he can register an appearance at his duties. 

The cost of operating on such a defective benefit system 
cannot be determined. Elaborate computations can be pre- 
pared to show what proportions of the salaries of employees 
of advanced age are regarded as earned and the difference 
between the amount paid and the amount earned can be labeled 
the cost of superannuation. It is part of the cost; but no 
statistical device exists for measuring the indirect losses that 
flow from keeping an employee in a position which he is in- 
competent to fill. If an employee in charge of an important 
government undertaking becomes superannuated and is re- 
tained improperly, the cost of his retention may far exceed the 
entire appropriation for that undertaking. The teacher, and 
the physician watching over matters of public health, may 
if disabled cause a loss to the community which bears no rela- 
tion whatsoever to the salary which they are receiving. Re- 
tention of the superannuated and the disabled may block the 
avenues of promotion and lessen the speed of work, and 
thereby destroy that morale which is essential if the public 
service is to be well administered. Losses of this kind cannot 
be measured. They have been understood by many public 
administrators and by many managers of large private cor- 
porations, and the attempted solution in practically all the for- 
eign countries and in an increasingly large number of cor- 
porations has been the establishmet of retirement systems. 

The establishment of a retirement system seems to be the 
only remedy for that situation which naturally exists in the 
public service in its absence, because it alone preserves per- 
manency of tenure and recognizes that administrators in gov- 
ernmental offices have no inducement to deal harshly with the 
disabled and the superannuated, but on the other hand have 
natural inclinations to keep them on the active roll as long 
as possible unless other provision is made for them. 

If a retirement system is adopted which must operate, in 
all its details, in the full light of publicity, so that the danger 

384 



CONCLUSIONS 



of organized effort to secure improper retirement allowances 
is largely eliminated, it may be made an instrument of great 
social value to the public. Not only will it improve the char- 
acter of the public service, but it will be a valuable agency of 
social insurance providing systematically for the care of the 
old and the disabled eliminated from the public service and 
possibly to a limited extent for the care of the dependents of 
deceased public employees. 

The employees will find that an equitable system, estab- 
lished with due respects to their rights, furnishes them at 
cost, protection which they could secure only with great diffi- 
culty, if at all, through private arrangements. It will also 
tend to improve the working conditions in the government by 
opening the avenues of advancement, and by giving an em- 
ployee a wider outlook and more inducements for self-devel- 
opment. 



A Valuable 
Agency of 
Social 
Insurance 



Benefits the 
Employee 



No Model System Universally Applicable. Since an ade- 
quate retirement system properly administered would without 
doubt be advantageous to the government, the employees, and 
the public, the important question for consideration is, "What 
is an adequate retirement system?" Unfortunately one can- 
not draft a model system which would necessarily be satis- 
factory for all public services. An ideal retirement age for 
policemen and firemen, for example, would be anything but 
ideal if applied to clerks. A uniform "flat" pension alike for 
all might be an excellent provision for a homogeneous serv- 
ice in which all enter young, serve about the same length of 
time, and progress at practically uniform rates of salary ad- 
vancement, but it would be probably a total failure in a com- 
plex service. In a book of this type the most that can be at- 
tempted is to recognize the questions involved and the general 
principles that apply; to others familiar with the detailed re- 
quirements of the service must be left the task of applying 
these principles to that service. In general, however, it may 
be said that an adequate retirement system is one that fulfills 

385 



What is an 
Adequate 
Retirement 
System ? 



RETIREMENT OF PUBLIC EMPLOYEES 

the requirements of that branch of the public service to which 
it applies and is at the same time fair to the employees as a 
class and to individual employees, satisfactory to a public ap- 
preciative of the potential social utility of such a system, and 

financially sound. 



The Old 

Present 
Employees 



Future 
Entrants 
and Young 
Present 
Employees 



System Must Be Applicable to Future Entrants. The em- 
ployees who are to enter the service after the system is estab- 
lished, and not the present employees who are already old, are 
the class that the legislators should have primarily in mind 
in establishing a retirement system. Much trouble has arisen 
in the past from failure to distinguish between the immediate 
superannuation problem and the real retirement system prob- 
lem. The employees who have already grown gray in the 
service are entirely different from the future entrants. They 
have escaped the dangers of early disability and of early death 
and have passed the age when they have to make decisions 
regarding remaining in the government or resigning to enter 
other work, and consequently to them the important benefits 
in a retirement system are those provided in the event of su- 
perannuation or long service with possibly some suitable al- 
lowance to the widow, in event of death soon after retirement; 
they cannot appreciate the importance which future entrants 
will attach to benefits in event of withdrawal or in event of 
early death or disability. They cannot contribute any material 
part of the cost of their own retirement. To them a retire- 
ment benefit will be in the nature of a special reward for long 
and faithful service that is entirely over and above the com- 
pensation agreed upon for their services. Consideration of 
retirement allowances as granted to the present elderly em- 
ployees gives, therefore, an entirely erroneous impression of 
the true nature of the retirement system. For the present old 
employees it is mainly a device for rewarding especially 
meritorious cases and for relieving distress. For the future en- 
trants it is a system of social insurance operated by the gov- 
ernment primarilv in its own interests and supported by the 

386 



CONCLUSIONS 

employees. The younger present employees resemble the 
future entrants more closely than they resemble the elderly 
present employees. In a few years the present elderly em- 
ployees will have passed on and in a few more years the em- 
ployees who entered prior to the establishment of the system 
will be comparatively rare. The success of the legislation 
therefore depends on the adequacy of the provisions for fu- 
ture entrants. It would in fact be wise to legislate in the 
first instance for the future entrants and then to adopt a dis- 
tinctly temporary system for such present employees as could 
not be treated substantially as future entrants. 



Benefits Part of Compensation for Future Entrants. Since 
the real retirement problem concerns the employees who enter 
the service after the establishment of a system, it becomes ex- 
tremely important to examine the statement just made, that 
as applied to future entrants a retirement system is a social 
insurance device established by the government primarily in 
its own interest, but operated at the expense of the employees. 
If this conception of the nature of the system can be accepted 
as sound, it vastly simplifies many of the perplexing questions 
of equities and social ethics that the general problem presents. 

That the cost of the system is borne by the employees is 
the only part of this statement that needs detailed considera- 
tion, because the resemblance to social insurance, if not at 
once apparent, becomes so on considering the contingencies 
of life that are involved. The true incidence of the cost of the 
system cannot be determined, in respect to future entrants, 
by the simple device of providing in the law that it shall be 
borne entirely by the government, or partly by the government 
and partly by the employees, for it is settled by the economic 
forces that govern wages, or as it can be more significantly 
expressed in dealing with the public service, by those eco- 
nomic forces which govern the quality of the employees which 
the government can secure for the compensation it offers to 
pay. General experience tends to show that even when the 

387 



Social 
Insurance 
for Future 
Entrants 



Incidence 
of the Cost 
Determined 
by Eco- 
nomic Forces 



RETIREMENT OF PUBLIC EMPLOYEES 



Benefits 
Included 
in the 
Compensa- 
tion 



Ultimate 
Burden 
Placed 
on the 
Employee 



government assumes all the cost of the system, the value of 
the retirement benefits, or perhaps more exactly their supposed 
value, is, as a matter of fact, taken into consideration in de- 
termining the amount of salary which will be attached to a 
particular position. Legislators and administrators will natu- 
rally rely in part on the attracting power of the promised bene- 
fits in getting the men they want at the salaries they offer. 
Candidates for positions will naturally consider the benefits 
in entering the competition for vacancies, men who would 
not compete for the salary alone will compete for the salary 
plus the promised benefits. Men once in the service who would 
resign if there were no benefits will be held because of them. 
The kind of employees which the government will get and keep 
under an honestly competitive system of selection will depend 
not solely on the money wages paid into the hands of the 
employees for immediate use, but upon the general conditions 
of service, of which the actual wages forms but a part, though 
of course a highly important part. Since better conditions 
draw better men, economic forces tend to place the ultimate 
burden on the employee; if the government attempts to carry 
it, the result in the long run is an equivalent improvement in 
the type of employees secured. The real incidence of the cost 
of a retirement system in the care of employees who enter 
the service after the establishment of the system is placed by 
economic forces on the employee. The benefits offered by the 
system become part of his compensation for the services ren- 
dered. 



Benefits Must Meet Employees' Needs. If this economic 
analysis be sound and the employees must ultimately bear the 
cost of the benefits, the conclusion is abundantly justified that 
the system must be broadly conceived as one of social insur- 
ance devised for the employees' protection. The best interests 
of the government manifestly lie in paying such compensation 
as it offers in a form that will at once protect it from the 
inevitable losses flowing ' from superannuation and disability 

388 



CONCLUSIONS 

and at the same time prove attractive and socially useful to 
its employees. The object of the government should not be 
to tie an employee to a particular job by making him sacrifice 
his provisions for old age if he leaves it, but to improve the 
general conditions of service, so that each employee shall, 
in so far as possible, have maximum opportunity for develop- 
ment, whether that development carries him beyond the con- 
fines of the service he happens to have entered or not. The 
broader the opportunities which the public service offers to 
men, the better employees it will get, and it can scarcely profit 
in the long run by curtailing the opportunities to be reached 
through its positions for the immediate narrow advantage of 
holding men in positions which they would leave except for 
an arbitrary device. Similarly the government must not seek 
to achieve its own more immediate objects — the elimination 
of the superannuated and the disabled — too cheaply through 
the device of forfeiture of all rights in the system in event 
of death in the active service, because such a provision breeds 
discontent and from the point of view of the employees is an 
unfair method of distributing the fund formed from their de- 
ferred pay. The general rule should be to meet the needs of 
the employees. 

The Contingencies to Be Covered. The system established 
to be adequate should therefore provide for benefits in event 
of the following contingencies 

i. Superannuation or advanced age. 

2. Ordinary disability, or loss of ability due to accident or 

disease occurring before the employee has satisfied the 
requirements for a superannuation benefit. 

3. Withdrawal from the service, whether by 

a. Resignation or 

b. Dismissal. 

4. Death in the active service. 

5. Death after retirement, if the employee on retirement 

389 



RETIREMENT OF PUBLIC EMPLOYEES 

so elects, through the establishment of optional methods 
of settlement. 

Accidents If the service is such that accidents or diseases directly due 

formance to the actual performance of duty are sufficiently numerous 
of Duty t warrant that course, special benefits should probably be in- 
cluded to provide for the contingencies of 

1. Disability due to the actual performance of duty. 

2. Death in the active service due to the actual performance 

of duty. 

3. Death after retirement because of disability due to the 

actual performance of duty, the death being directly 
attributable to the same cause as the disability. 

Some question may arise as to whether these cases should 
not be provided for under general workmen's compensation 
laws. It would seem, however, that the special needs of the 
service could be better met by a comprehensive retirement sys- 
tem covering all contingencies and properly correlating the 
benefits than by bringing certain of the contingencies under a 
law designed for a class somewhat different from public 
servants. Care must of course be exercised to see that the 
provisions under the retirement act at least comply with the 
standards established by the compensation act in so far as 
they are applicable to the same class. 

Cases in The conclusion can be definitely drawn that no special bene- 

Benefits 110 fit should be granted in the event of 

Should Be 

Granted i. Inefficiency from causes other than accident, disease or 

old age. 
2. Abolition of positions or reorganization of office because 
of changes in the work of the government. 

If the employee leaves the service for one of these causes 
he should receive from the retirement system only the ordi- 
nal*}* or regular withdrawal benefit. 

390 



CONCLUSIONS 

The general reasons for these conclusions have in the main 
been sufficiently indicated, but some explanation will perhaps 
be demanded regarding the ground for a benefit in event of 
dismissal and, possibly from another set of readers, for the 
failure to recommend any special allowance in event of aboli- 
tion of position or reorganization of office. 

Unless a benefit in event of dismissal is provided, a retire- Forfeiture 
ment system adds to the reluctance of administrative officers ° t Dismissal 
to eliminate unsatisfactory employees in that way. If an a Doubtful 
employee with fairly long service becomes unsatisfactory, say, 
for example, because of intemperance, the administrator will 
hesitate to dismiss him if dismissal means loss not only of 
immediate wage but also of the employee's provision for old 
age. If a benefit on resignation is provided the lenient admin- 
istrators and those susceptible to pressure from the employee's 
"influence" will let unsatisfactory men go by the resignation 
avenue, with the result that discrimination will arise. Fur- 
ther discrimination will come from the fact that the financial 
penalty involved will vary in different cases, depending on how 
long the employee has been in the service. An old employee's 
equities in the retirement benefits may amount to several thou- 
sand dollars, and it is very questionable whether authority to 
impose such penalties should be placed in the hands of admin- 
istrative officers. Their power to reprimand, to furlough, to 
withhold promotion, to reduce in salary, and to dismiss is 
sufficient to permit them to maintain proper discipline, and 
even now no device has been perfected to make sure that these 
powers are fairly exercised. To give them further power to 
deprive an employee of his provision for old age, compul- 
sorily saved out his compensation, is a doubtful administra- 
tive expedient. If the employee has been guilty of vicious 
criminal misconduct the proper tribunal for the trial of the 
case is manifestly the duly established criminal courts where 
the employee may have his constitutional rights and where the 
penalty imposed will be the legal penalty. The public can 
scarcely consent to turning over to administration officers, not 

39i 



RETIREMENT OF PUBLIC EMPLOYEES 



The Rights 
of Employee 
at Dismissal 
Must Be 
Respected 



No Benefits 
in Case of 
Abolition 
of Position 



properly equipped with machinery for doing justice, the right 
to impose a special penalty for an offense over and above the 
right to terminate immediately the contract of employment. 
Socially the retirement benefits are not merely the provision 
for the employee as an individual, but for him and his depend- 
ents. The family's need for its savings is at a high point 
when the principal breadwinner is dismissed from his posi- 
tion, and a system of compulsory savings that automatically 
deprives the family of its savings in this contingency is so- 
cially indefensible. A socially desirable provision in a re- 
tirement system might possibly be one that permitted the fam- 
ily of the employee in the event of resignation or dismissal 
to file with the administrators of the system a claim to the 
employee's equities which would operate to suspend their pay- 
ment until the proper court having jurisdiction over domestic 
relation could pass on the case and issue the necessary court 
orders. Without further limitations the rights of the em- 
ployee in event of dismissal should be fully respected to the 
mutual advantage of the government, the employees, and the 
public. 

Since the ordinary employee devotes all his time to the gov- 
ernment service he loses touch with outside avenues of em- 
ployment, and since much of the work of the government is 
monopolistic in character, his knowledge of that work, which 
is his principal stock in trade, is of no value to anyone ex- 
cept the government. On this ground a claim is frequently 
advanced that the retirement system should systematically in- 
sure against loss of position through changes in the require- 
ments for which the employee is in no way responsible. The 
conclusion against the wisdom of such a benefit is based not 
on a belief that such employees deserve no special considera- 
tion, but on the belief that the retirement system is not the 
proper medium for supplying it. The conclusion of such a 
device in the English system led to abuse because it furnished 
a way for retiring on specially advantageous terms employees 
who were inefficient without excuse and for reorganizing an 

392 



CONCLUSIONS 

office to eliminate an unpopular clique. Cases in which change 
of work throw employees out apparently ought to be taken 
care of by providing that when employees become redundant 
the administrators of the retirement system shall have power 
to place them in positions in other offices which are within 
their capacity. If wholesale reorganization is undertaken, the 
question of caring for the displaced employees should be spe- 
cially considered in connection with the legislation authorizing 
the change. The contingency is one that cannot properly be 
met by a retirement system since it is sporadic and each case 
presents its own peculiar features. 

The Conditions Upon Which Benefits Are to Be Granted 

The conditions upon which benefits are to be granted con- 
stitute a complex problem the solution of which depends 
largely upon the nature of the service to which the system is 
to be applied. Certain fairly definite conclusions can, how- 
ever, be drawn if one makes the customary reservation that 
there are exceptions to all rules. The conclusions given may 
be termed prima facie, for it can at least be said that the bur- 
den of proof lies on those who would follow some other 
course. 

Benefits to Be Granted as Rights. All benefits under a re- 
tirement system should be granted as of right to the employee 
when he has fulfilled the requirements established in the law 
or under it, and they should never be granted on the discre- 
tion of the administrators. This conclusion is so abundantly 
supported both by the theoretical analysis that the employee 
has earned the benefits and by the overwhelming evidence of 
the English experience that one questions whether even in an 
ordinary disability benefit a discretionary feature would be 
advisable in an effort to reduce its attractiveness and thus pre- 
vent fraud. Maximum and minimum limitations on the 
amount of benefit to permit of recognition of the specially 
meritorious are within the ban; and such recognition if de- 

393 



RETIREMENT OF PUBLIC EMPLOYEES 

sired must be made by basing benefits directly or indirectly 
on salary and raising salaries according to merit. The re- 
tirement benefits are not to be used for disciplinary purposes. 
When an employee is retiring it is too late to punish him for 
a past offense, if punishment is to be educational. Experi- 
ence shows that fear of possible reduction in retirement allow- 
ances in the future acts alike on the just and the unjust and 
instead of working for the advantage of the government in- 
variably produces general dissatisfaction. However desirable 
a discretionary feature may sound as a disciplinary measure 
to those who like to give administrators maximum control 
over their subordinates and who accept the theory that re- 
tirement allowances are unearned by the employee and are 
merely rewards for meritorious service or charitable grants, 
it must always be remembered that the exercise of discretion 
in the public service is subject to those forces termed "influ- 
ence." The ramifications of influence that one discovers in 
studying the experience of retirement systems that give discre- 
tionary benefits are so pernicious that it is impossible to over- 
emphasize the importance of granting benefits as a right. No 
man should have a discretionary power over a woman's al- 
lowance under a retirement system; no government official 
should be in a position where his performance of his duties 
can be affected by the fact that any man or group of men 
have power to deprive him of his provision for himself and 
his family in the event of the happening of one of the catas- 
trophies of life. 

The Conditions of the Superannuation Retirement Benefit 

Compulsory Retirement Provision Necessary. A compul- 
sory superannuation retirement provision should be included 
in all systems devised for the public service, because without 
such a provision, a system fails to accomplish several of the 
important purposes for which it is designed. Some employees, 
although superannuated, will desire to remain in the active 

394 



CONCLUSIONS 

service, and this desire may be fairly general if the superan- 
nuation benefits are small in comparison with active salaries. 
Although the provision of benefits will encourage adminis- 
trators to suggest retirements in some cases, it will not elim- 
inate those forces that operate in the absence of a system and 
many employees will be retained after their usefulness is gone. 

Unfortunately the difficulty of removing a superannuated Damage 
employee from a responsible position is probably greater than R e a t ginf n by 
the difficulty of removing one from a routine place, yet the a Superan- 
damage caused by retaining the employee in the upper position Employee 
may be almost infinitely greater. Not only may such an em- 
ployee administer the undertakings submitted to him poorly, 
but he is choking the avenues of advancement. One vacancy 
at the top involves advancement all down the line. Stagnation 
in promotion breeds inefficiency and lack of interest, whereas 
opportunity for advancement keeps up the morale of a force. 
The employees on entering a service ought to be glad to agree 
to leave when they have attained the fixed age, in considera- 
tion of this one fact, that such a provision results in some 
flow of promotion. Too frequently in the public service the 
entrance salaries are comparatively high and the ultimate 
salaries comparatively low. Coupled with this situation is 
the American practice of reserving the better-paid positions 
for political appointees who may or may not know anything 
at all about the work they are to undertake. Many employees 
after accepting a government position find it difficult to leave 
because few private employments offer so large an entrance 
salary and yet they have little incentive for enthusiastic appli- 
cation because the prospects of reward are remote. This prob- 
lem of salary scales for public service is one of great im- 
portance in promoting efficiency in public business. It cannot 
be solved entirely by a retirement system, but the inclusion of 
a compulsory retirement provision operates in that direction. 
Care must, however, be exercised to place this compulsory age 
at a point sufficiently high so that competent men will not be 
turned off in large numbers. 

395 



RETIREMENT OF PUBLIC EMPLOYEES 

Permission An objection is not infrequently raised against the corn- 

After Com- pulsory age that in exceptional cases it deprives the govern- 
pulsory Age m ent of the services of the very men it may need most. The 
English device of permitting men to be retained after the com- 
pulsory age for an additional period of not exceeding five 
years under exceptional circumstances should be mentioned 
in this connection. Honestly administered, and carefully pro- 
tected by full provisions for publicity and by some curtailing 
of aggregate compensation, it undoubtedly has merits, espe- 
cially as it permits fixing the general compulsory age of re- 
tirement at a somewhat lower point than would be just with- 
out it. If one could be sure that political influence would not 
be used to make the exception the rule, and that only those 
men who were especially well qualified would be retained, the 
device would appear to be one which should come into general 
adoption. 

A Permissive Superannuation Age Below the Compulsory 
Age. Men fail at very different ages and the ordinary super- 
annuation conditions must allow for that fact by establish- 
ing an age, probably not more than five years below the com- 
pulsory age, on the attainment of which an employee may 
claim his superannuation benefits as a right if he elects to 
retire, or if he is asked to retire, or if he is dismissed. Whether 
such a provision is necessary in athletic services is perhaps 
more open to doubt than in the case of a sedentary sen-ice. 
For such retirement he should not be required to establish 
any unfitness. To prevent him from exercising this right un- 
less he believed it reasonably necessary, and to recognize the 
equities as between employees, the amount of the benefit which 
he would receive should be considerably lower than the benefit 
payable at the compulsory age. 

Superannuation Conditions to Be Based on Age. The con- 
ditions for the superannuation benefit should in practically all 
departments be based on age and not on length of service. The 

30 



CONCLUSIONS 

relationship between age and the failure of strength and abil- 
ity rests on natural laws; whereas in an ordinary branch of 
the government work, length of service bears nc necessary 
relation to ability, except in so far as it generally follows that 
long service means fairly advanced age. The employee who 
enters the employ of the public late in life may be superan- 
nuated after short service, whereas he who enters young may 
have many years of service to his credit and still be the best 
man in his department. Statements are occasionally made 
that a particular service is peculiarly wearing and that a cer- 
tain number of years in it destroys a man's usefulness. Ade- 
quate evidence to support the contentions is generally lacking. 
Service conditions where established have frequently led, 
moreover, to the voluntary retirement of employees still in 
the prime of life and to the retention of superannuated em- 
ployees in the active service, because they have not yet satis- 
fied the retirement conditions. The presumption is almost, 
conclusive in favor of conditions based on age and against con- 
ditions based on service. 

The Exact Ages to Be Selected. The exact ages to be Difference 
selected will depend on the nature of the work which the em- in Athletlc 

r and 

ployees are called upon to do and the extent to which it proves Sedentary 
possible to correlate the different branches of the government 
so that men from the athletic service will be transferred to 
sedentary services as soon as their athletic powers begin to 
fail. If no such correlation proves feasible, comparatively 
low ages have to be established in athletic services, and the 
benefits have to be provided on the assumption that the retired 
employees will find sedentary occupations for themselves after 
retirement. If the service is sedentary, higher ages have 
to be set and the benefits have to be provided on the assump- 
tion that in the average case the retired employee will not 
take up any new business after retirement. In considering 
the ages the parties must never lose sight of the question 
of costs. Low retirement ages mean extremely high costs 

397 



Services 



RETIREMENT OF PUBLIC EMPLOYEES 



Differences 
Between 
Men and 
Women 



Merely a 
Milestone at 
Which No 
Proofs of 
Disability 
Are 
Required 



and high ages extremely low costs. A matter of a year or 
two is never one to be treated lightly. 

The English system for civil servants permits superannua- 
tion retirement at sixty and compels it at sixty-five with the 
exception that under special circumstances an employee may 
be retired to age seventy. Some systems have permitted 
women in sedentary occupations to retire at fifty-five, whereas 
the men could not retire until sixty. A question may be raised 
whether an arrangement for special leave of absence for 
women, possibly for a year or more, either at full pay or 
at reduced pay, might not relieve the nervous strain to which 
their earlier breakdown is frequently attributed and permit 
them to return to active service. The statistics are conclusive 
that they are longer lived than the men, and it is very doubt- 
ful if the conditions leading to their earlier retirement are 
permanent and result in more than temporary incapacity. One 
would be inclined to question whether the ages established by 
the English system were not the minimum ages for a sedentary 
service and whether if no provision is included for retention 
beyond the compulsory age in exceptional cases it might not 
be wise to raise both the permissive age and the compulsory 
age from three to five years, making them either sixty-three 
and sixty-eight or sixty-five and seventy. 

In deciding upon ages for the superannuation benefit, two 
points must always be kept in mind. The first is that a disa- 
bility benefit is the proper device to take care of cases in which 
accident or disease destroys an employee's earning capacity 
before he has satisfied reasonable conditions for a superan- 
nuation benefit. The age conditions for superannuation re- 
tirement, in an adequate system, do not establish an age be- 
fore which no man may retire, but merely an age before which 
no man may retire without full proof that he is disabled by 
accident or disease. The minimum permissive age is estab- 
lished as the milestone at which the presumption of declining 
ability is sufficiently strong to permit of the waving of the 
strict requirements for concrete proof of disability. 

398 



CONCLUSIONS 



The second point is so fundamental that its importance can 
hardly be overemphasized. A retirement system is not a de- 
vice created to give able-bodied, competent employees a period 
of leisure at the end of their lives. The whole weight of the 
evidence regarding male employees, at least, is that the great 
body of them have no desire for the creation of such a period, 
and that however attractive the prospect of retirement to 
leisure may look when one is young or in early middle life, 
it loses its attractiveness as one grows older. The ambition 
becomes to stay in harness to the end and the man who is 
retired because he has reached the compulsory age imme- 
diately seeks some other employment. Emphasis once again 
must be placed on the fact that the retirement device is an 
insurance system not created to give a particular class a 
leisure period at the end of life, but to protect them from 
the danger of loss of earning capacity due to advancing 
age. 

The cost of this insurance is borne by the employees them- 
selves, and consequently as a class they must be on their guard 
against those of their leaders who adopt the view that the 
purpose of a retirement system is to reward faithful servants 
with a "chance to rest" and that the conditions established 
(this type of person generally argues for a service condition) 
should be placed sufficiently low so that "we may get our pen- 
sions while we are still young enough to enjoy them." That 
is not only wrong philosophy regarding the nature of a re- 
tirement system ; it is a wrong philosophy regarding life. The 
great majority of employees will not entertain it when they 
reach the minimum retirement age. A minority will not only 
entertain it, but will retire at the earliest possible moment; 
and unless great care is exercised, the great body of honest, 
hard-working members of the system will discover that they 
have paid high premiums throughout life to provide these 
early retirers with a period of rest which is of no social utility 
and is enormously expensive. Early retirements are neces- 
sary in rare cases; the system should provide for them, but 

399 



Not a 
Device for 
Giving 
Able-bodied 
a Leisure 
Period 



The 

Wrong 
Philosophy 
of Life 



RETIREMENT OF PUBLIC EMPLOYEES 

only after disability has been established through the most 
rigid examination the legislators find it feasible to devise. 



Conditions 
Which 
a Law 
Should 
Contain 



The Conditions of the Disability Benefit 

The section of the law providing for benefits in ordinary 
cases of disability, or of all disability if no distinction is to 
be made between ordinary disability and disability in the 
actual performance of duty, should probably establish the 
following conditions to a grant 

i. That the employees should be disabled as the result of 
accident or disease. 

2. That the disability be permanent. 

3. That the disability be total; or if partial only, that it 

shall disqualify the employee for all service under the 
employing government. 

4. That the facts shall be established 

a. At the instigation of the employee's adminis- 

trative superior acting along the usual line of au- 
thority on the ground that 

I. Because of accident or disease the employee 

is unable to be present at his duties in com- 
pliance with the attendance requirements, 
or 

II. Although able to attend, he is unable to per- 

form the required duties while maintaining 
proper personal relations with his fellow 
employees, or 

III. Although able to attend and perform his 
duties satisfactorily he is believed to be suf- 
fering from some disease which endangers 
the health of his fellow employees. 

b. By an independent physician or board of physicians 

selected by the officers in charge of the retirement 
system. 

400 



CONCLUSIONS 

5. That the grant of an allowance shall not be made in the 

first instance for more than a certain short period — 
probably not more than three years — and that at the 
end of that period all the facts shall again be reviewed 
by the physician or physicians and by the other officers 
in charge of the retirement system, and a new grant 
made, or the employee recalled to duty as the case may 
demand. 

6. That all grants shall be subject to cancellation at any 

time if any material change takes place and that the 
employee may be recalled to duty, and if the employee 
is found engaged in an occupation which is incon- 
sistent with disability or if a woman employee has 
married subsequent to the occurrence of the disability, 
it shall be canceled, and if fraud is established the em- 
ployee shall forfeit the privilege reinstatement in the 
service. 

7. That the independent physician or physicians appointed 

by the retirement board shall have the right to examine 
the person of the employee. 

8. That all persons prior to appointment shall be examined 

by physicians selected by and representing the govern- 
ment, and none shall be admitted to the retirement 
system who are suffering from any disease or condi- 
tion that will or is likely to disable them for the duties 
they are to perform. 

9. That the insurance against disability shall operate from 

the date of appointment, provided the government's 
physician has made the examination and his report has 
been accepted as satisfactorily establishing the admissi- 
bility of the employee to the system. The insurance 
shall not operate prior to the completion of all the 
steps in the examination. 
10. That if the disability disqualifies the employee for the 
duties of his position, but does not disqualify him for 
all service under the government, the administrators 
401 



RETIREMENT OF PUBLIC EMPLOYEES 

of the retirement system shall have authority to have 
the employee appointed to the next vacancy occurring 
in a position which he is qualified to fill. 

These conclusions regarding conditions are of course prima 
facia, but departures from them with a view to making re- 
tirement easier should be made with extreme caution and only 
for the purpose of meeting an imperative situation. Great 
care has to be exercised to prevent fraudulent retirements and 
to protect the honest employees from being taxed for the 
maintenance of the dishonest. 
No Pro- Persons who are interested in having retirement systems 

Temporary developed to give complete protection to the employees will 
Disability no t e that no provision is made under these conditions for tem- 
porary disability. The precedents apparently all favor caring 
for temporary disability through regulations governing sick 
leave. This course would seem to be the wiser one in the 
public service, because the responsibility for administration 
is left in the hands of the employee's immediate superiors who 
have a measure of control over the employee which could 
hardly be secured by a system of sickness insurance that would 
almost necessarily have to be more highly centralized. The 
sick leave regulations, however, must in many cases be re- 
vised to make them dovetail into the provisions of the retire- 
ment system and form one comprehensive system. 

If special benefits are provided to cover cases of death or 
disability due to the actual performance of duty, machinery 
must be established to prevent employees suffering from ordi- 
nary disability securing benefits on the ground that their 
trouble arose in the actual performance of duty. If an inde- 
pendent medical board is established for ordinary disability 
retirements the decision in the first instance might well be 
left to it. 

The Amount of Benefit 

Not to Be Discretionary. In respect to the amount of the 
benefit to be provided and the basis for determining it, one 

402 



CONCLUSIONS 

can scarcely be dogmatic. The only general conclusion that 
can be stated with reasonable assurance is that the exact basis 
for determining the amount shall be established in the law 
and that it shall not be in any way left to the discretion of 
any administration officer or group of officers. 

In Relation to Salary. Whether the amount of the super- Question 
annuation benefit shall be related to salary — directly or indi- Benefits*'?? 
rectly — or whether it shall be entirely independent of salary, Salary 
probably depends on the nature of the service for which the upon the 
system is established. If the service is homogeneous and all Nature . 
enter at approximately the same age, at approximately the 
samt salaries and become superannuated at approximately the 
same age after having had a fairly uniform history of salary "Flat 
or wage advancements, a uniform retirement allowance of a Pension " 
fixed amount — the so-called "flat pension" — is indicated. If 
the service receives employees of widely different ages, but 
pays all about the same rates of wages, the system of requir- 
ing a fixed contribution alike for all — either from the govern- 
ment, the employee, or the two combined — and basing the 
amount of the benefit on the purchasing power of the accu- 
mulation at the time of retirement is possibly applicable. Its 
defect is that it will not produce adequate benefits for late 
entrants, but this objection can probably be overcome in part 
by charging late entrants an extra premium to be deposited 
to their credit so that their accumulation or retirement may 
be larger and hence the annuity purchasable more nearly ade- 
quate. Neither of these systems is satisfactory, however, if 
the salaries paid different employees are very different. In 
that case the indications are that the benefits should be related 
to salary. 

The advisability of the consistent application of this prin- 
ciple of relating benefits directly or indirectly to salary is not, 
however, universally conceded. Several persons who have 
given the subject careful thought are opposed to applying the 
element of compulsion involved in a retirement system any 

403 



RETIREMENT OF PUBLIC EMPLOYEES 

further than is necessary to provide a minimum of subsistence 
for the superannuated employees. They believe that the 
amount directly or indirectly withheld from an employee's 
immediate compensation to purchase retirement benefits 
should be reduced to the lowest possible minimum, and that 
in so far as possible, consistent with protecting the govern- 
ment from the losses due to disability and superannuation, 
the employee's compensation should be given him when earned 
to do with as he will. This philosophy results in using either 
the fixed contribution system, or the "flat pension" system 
even in a service having large salary variations; or if a rela- 
tionship to a salary is adopted, in limiting the size of the salary 
to which the system applies, all salary above the limit being 
disregarded. 

The persons who advance this argument regard compul- 
sion as a necessary evil and they think it should be applied 
only in so far as it is absolutely necessary. Without entering 
into the controversy regarding the merits and defects of com- 
pulsion, 1 one may question whether a "flat pension," or a re- 
tirement allowance based on the accumulation from a fixed 
contribution, will in fact accomplish the necessary elimination 
of the superannuated, without giving rise to new difficulties. 
Obviously if the superannuation benefit is a mere minimum 
of subsistence, no highly paid official is going to retire until 
he is compelled to do so. His fellow upper-employees are 
not going to force him out to what they will regard as com- 
parative penury, because a sort of "consciousness of kind" 
will develop. The etiquette of the service will be that all 
highly paid men remain. The answer may be made that the 
compulsory retirement age will take care of that; but what 
energetic, able employee who has reasonable prospects outside 
the public service is going to remain in it if he is to be dropped, 

1 It is interesting to note that the faculty of Harvard University in 
considering the proposals of the Carnegie Foundation for the Ad- 
vancement of Teaching has favored the idea of compulsory savings 
for college teachers. See Harvard Alumni Bulletin, Nov. 7, 1916. 

404 



CONCLUSIONS 

say, at sixty-five with a minimum of subsistence? He will 
naturally seek employment which has no compulsory retire- 
ment age, or which has a retirement system giving what ap- 
pear to him as reasonable benefits. Instead of making the 
public service attractive to good men, the system would make 
it repulsive. For this reason the conclusion seems fair that 
in a service having a large range of salaries relationship 
between salary and retirement benefits is essential in respect 
at least to future entrants and that no upper limits are de- 
sirable. 

If the service has a wide range of salaries, the founders of Direct and 
the system will therefore face the difficult question of whether R n e i a r t io nship 
the relationship between salaries and benefits shall be direct to Salary 
or indirect. If it is to be direct, the employee will, in all 
probability, be offered as a superannuation allowance a certain 
fraction of his salary for each year of his employment — say 
one-eightieth if the employee entering at twenty is to be per- 
mitted to retire at sixty on half pay. If it is to be indirect, 
the employee will have a superannuation benefit account in 
which will be deposited to his credit at stated intervals a cer- 
tain fixed proportion of his salary earned since the last pre- 
ceding deposit. The deposits will be allowed interest, and 
when the employee retires the whole accumulation to his 
credit will be taken to purchase an annuity, which is to be 
his superannuation benefit. Since the deposits were propor- 
tioned to his salary, the amount of the benefit will depend in 
part on the amount of his salary and in part on how long his 
deposit has been accumulating interest. 

Almost all precedents and the preponderance of the evi- Direct 
dence of the English actuaries are unquestionably in favor of ^ el saiar ShiP 
the system establishing a direct relationship between salary Undesirable 
and the amount of superannuation benefit; yet the writer is 
not only unable to record a conclusion in favor of direct rela- 
tionship, he is of the opinion that it is undesirable and that the 
ultimate solution of the superannuation retirement problem 
lies in the perfection of savings and annuity systems which 

405 



RETIREMENT OF PUBLIC EMPLOYEES 

base the amount of the contributions to be saved and invested 
at compound interest on the salary the employee earns and 
the amount of the superannuation benefit on the accumulation 
to the employee's credit. Under such a system no definite pro- 
portion of any salary should be absolutely promised as a bene- 
fit; the benefit should rest solely on the purchasing power of 
the aggregate accumulation available on retirement. 
Precedents That most systems should have used the direct relationship 

Relationship * 3 ent i re b~ natural, because the immediate aim of their 
founders has been to eliminate the superannuated; and they 
have generally appreciated that relationship between benefit 
and salary is necessary to accomplish that end. The more 
obvious procedure is to make the benefit a certain proportion 
of salary, and since many of the older systems were estab- 
lished by laymen without professional advice, the benefit di- 
rectly related to salary became the typical one. 

When the actuaries have been consulted, they have ap- 
parently conceived the problem mainly from the point of view 
of the business administrator who desires a system which, for 
the least expense, will accomplish the elimination of the dis- 
abled and the superannuated. Expenses can be reduced to 
a minimum by a high degree of collectivism, gathering all 
assets into a common fund, not ear-marked for any individual, 
and distributing them according to the immediate needs of 
the service. Such a system means minimum assessments for 
superannuation and disability protection because it involves 
forfeitures in the event of the happening of the other contin- 
gencies, and gives benefits according to those needs without 
consideration of the relation between cost of the benefits given 
and the contributions by or in behalf of the particular em- 
ployee to whom they are given. The actuaries have apparently 
rather looked with disfavor on benefits in the event of other 
contingencies, because such benefits increase cost. They have 
not perhaps as a class given sufficient weight to the fact that 
natural forces in the lives of the employees inevitably lead 
them to prefer somewhat higher premiums or somewhat lower 

406 



CONCLUSIONS 

superannuation and disability benefits if insured against for- 
feitures; and although such an authority as Mr. Henry W. 
Manly has recognized that the cost of the retirement system 
is probably borne by the employees, the actuaries have ap- 
parently not generally analyzed the systems along that line. 
They have dealt too largely with private funds in which com- 
pulsory retirement ages were not established so that inequities 
of one kind were perhaps offset by inequities of another. 
When benefits in event of death, resignation and dismissal are 
recognized, not as excrescencies to be conceded begrudgingly, 
but as integral parts of the system, to be provided for at the 
outset, when disability is covered as a separate contingency 
on the insurance basis, and fairly uniform compulsory retire- 
ment ages are established, the objections to the savings and 
annuity system for protection against old age seem to be 
of comparatively little weight. 

Against the direct relationship device, on the other hand, Objections 
grave objections have to be advanced, since its use, in a sys- Re^'j^shi 
tern scientifically administered on an actuarial reserve basis, 
necessitates the application of the salary scale in such a way 
that it becomes a vital part of the foundation of the entire 
structure. Against such a use of the salary scale four objec- 
tions are raised: (i) it introduces an element of financial in- 
stability into the fund, (2) it interferes with administrative 
changes, (3) it is inequitable as between employees of differ- 
ent classes and as between different employees of the same 
class, and (4) is not readily adaptable. These objections have 
been considered at length in the chapter on superannuation 
benefit (page 128) and no attempt will be made to repeat 
the detailed discussion there given, but a brief review of the 
more essential features will perhaps be worth while to make 
clear the general nature of the objections and the reasons for 
preferring the indirect relationship device. 

The salary scale is an actuarial computation used to fore- 
cast the rate of change which will take place in the salaries 
of the employees in the future as they serve from entrance 

407 



RETIREMENT OF PUBLIC EMPLOYEES 



Interferes 
with Admin- 
istrative 
Changes 



Inequitable 
as Between 
Employees 



to final retirement. Its use is necessary to determine on what 
salaries the retirement benefit to be paid in the future will be 
based and if contributions are provided, as percentage of 
salaries, on what salaries these contributions will be based. 
It rests primarily on data regarding the salaries of present 
employees or of employees of the immediate past, and it in- 
volves the use of averages. It makes two assumptions, (i) 
that the rate of salary change as reflected by the data for the 
present employees or those of the immediate past is a rea- 
sonably correct index of the rate of change to take place in 
the future and (2) that averages are suitable for use in mat- 
ters involving the equities of employees. 

Since the salaries and wages existing in a service at any 
time are the resultants of complicated forces which are in 
unstable equilibrium, the assumption that the present is a suit- 
able index for the future is subject to attack. Changes in eco- 
nomic conditions, successful movements for salary adjust- 
ments, reorganizations, introductions of new methods, and 
the development of new branches of the service, may occasion 
deficits in the actuarial reserves, which will cause trouble. 

That a reform, otherwise desirable, would occasion a heavy 
deficit in the retirement fund, might become the conclusive 
argument for preserving an unsatisfactory existing situation. 
American administrative officers, in increasing numbers, are 
recognizing the importance of overhauling the salary pro- 
visions in the public service to make them less rigid, more 
responsive to the changes in economic conditions, and better 
arranged to offer incentives to the type of men the public 
requires for its work. These reforms would undoubtedly be 
hampered if the change meant that the reserve fund accumu- 
lated to pay retirement benefits would have to be supplemented 
by large additional appropriations. 

Equity cannot be done employees on the average. Under 
a retirement system supported wholly by contributions from 
the employees, those who advanced at a rate above the average 
would receive in benefits more than they had paid for; the 

408 






CONCLUSIONS 

fund could give it to them only because the employees who 
advanced at a lower rate than the average would get less than 
they paid for. A gambling element would thus be introduced. 
Each pay-day the employee would know his immediate wage 
only; he would not know what the value of his retirement 
rights in respect to the service rendered might be, because 
their real value would depend on what his final salary might 
be or what his average salary would be over a term of years. 
Two men might be working side by side, each doing equally 
good work for equal immediate wage, but one might really 
be getting considerably more than the other because the more 
poorly paid might later in life be the one who was not given 
the vacancy above when it occurred. If benefits are based 
on the salary earned at retirement, the greatest prize, in pro- 
portion to contributions, goes to him who in the last years 
of his service springs from a minor position to an important 
one. The obvious danger from such a provision can be over- 
come by basing the benefits on average salary throughout 
service, but even then the element of unfairness would not 
be entirely eliminated. The fair arrangement seems to be to 
say to each employee each pay-day, "You have been paid for 
your services this sum of which so much is given you in cash, 
so much deposited to your account in the superannuation 
system, and so much utilized to pay the premiums on your 
disability insurance and on your life insurance," if a special 
life insurance benefit is provided. The employee gets the 
advantage of collectivism in the annuities, where collectivism 
is equitable, and he is preserved from compulsory collectivism 
in determining the amount of the annuity where collectivism 
operates to the advantages of those exceeding the average in 
rate of advancement and to the disadvantage of those falling 
below. 

The direct relationship device complicates the matter of Not 
withdrawal benefits and of benefits in event of death if no Adaptable 
special life insurance provision is made. The indirect or sav- 
ings and annuity system is simplicity itself because the em- 

409 



RETIREMENT OF PUBLIC EMPLOYEES 



Relationship 
to Length 
of Service 



Indirect 

Relationship 
to Salary 



ployee's contributions are deposited to his account and are 
merely paid over on those contingencies or applied as the law 
may direct. 

A relationship between the amount of the superannuation 
benefit and the length of the employee's service is desirable. 
In systems basing benefits directly on salary this relationship 
is provided by an arbitrary scale. Generally this scale again 
involves collectivism ; those who retire early get more for their 
contributions proportionately than do those who retire later. 
The indirect system includes no such element of collectivism 
in its superannuation provision. So far as superannuation 
provisions are concerned each employee gets what the deposits 
to his credit with the interest will buy. Very early retirers 
because of accident and disease, under an adequate system of 
this type, would be cared for by disability insurance and their 
accumulation toward superannuation; later retirers leaving 
after the superannuation age would get what they themselves 
had directly or indirectly provided. The anxious-to-retire-at- 
once employees would not be insured a larger benefit than they 
had paid for at the expense of the anxious-to-stay-in-harness. 
Genuine cases of disability occurring soon after the superan- 
nuation age would have provision under a proper system as 
great as they would have had if disabled before, but not as 
great as if they had remained to the compulsory age of retire- 
ment. The rising accumulation of compound interest and the 
fall in the cost of annuities would offer strong inducements 
to remain, so strong in fact that the compulsory age would 
probably become the regulation age except in cases in which 
the employee met with some accident or disease necessitating 
retirement or in which he was asked to go because of failure 
in abilities. 

L'nder a simple system having indirect relationship to salary 
the deposits made to the account of each employee are a fixed 
percentage of salary alike for all regardless of their age at 
entrance. Unless all enter at approximately the same age 
such a device is more or less defective, because if adjusted to 

410 



CONCLUSIONS 

give suitable benefits to the early entrants, it gives very small 
benefits to the late entrants. This difficulty can readily be 
overcome by fixing the percentage of salary to be con- 
tributed in respect to an employee according to his age at 
entrance. Young entrants will require only a low percentage, 
late entrants a high one. If the state is to make contributions 
it would seem as if it should give a like percentage of salary 
or a like amount of money for each employee regardless of 
age at entrance and that the variation caused by differences 
in age at entrance should be treated as personal and should be 
met by the employee. A maximum limit should of course be 
placed on the percentage of salary that is to be deposited for 
superannuation benefits, because otherwise in the case of per- 
sons entering at late ages the percentage deductions would be- 
come prohibitive if the attempt were made to provide for 
them anything like the same benefit that was desired for em- 
ployees who had given their whole life to the service. 

The correct procedure would appear to be to decide first Approx- 
approximately what proportion of, say, the average salary potion of" 

of the last few years of service it seemed desirable to provide Salary 

' . « - , , , . Should Be 

as a superannuation benefit at the compulsory age of retire- Decided 
ment, and then to have the actuary determine what proportion 
of salary would have to be set aside each year to provide for 
an annuity of that amount in respect to entrants at each age. 
If the entrance ages differ materially, the percentage would be 
comparatively low for the earliest years, and prohibitively 
high for the latest. Decision could then be made as to what 
is a reasonable maximum percentage of salary to be paid as 
a contribution; and for all entrance ages at which the per- 
centage necessary to provide the desired benefit exceeded the 
maximum thus established the contribution rate would be re- 
duced to the maximum and the benefit correspondently de- 
creased. In this way all who enter the service early enough 
in life to be able to afford the benefit selected as ideal would 
get that benefit, whereas those who entered too late to afford 
it would get as large a benefit as they could afford. A serious 

411 



First 



RETIREMENT OF PUBLIC EMPLOYEES 



The Salary- 
Scale Should 
Be an In- 
strument of 
Measure, 
Not the 
Foundation 
of the 
Structure 



question would arise as to whether persons ought to be ad- 
mitted to the service after a certain age. 

The actuary in making his calculations to determine the 
percentage contributions necessary to give the desired pro- 
portions of the average salary of the last few years of service 
would have to use the salary scale, but it would not become 
part of the foundation of the structure, it would be merely 
an instrument of measure used in designing it. Any defects 
would not affect the financial stability of the structure, or 
make it an obstacle to administrative reform, or give rise to 
inequities; they would merely make the benefit a little larger 
or a little smaller than the founders considered ideal. Per- 
haps a word or two of explanation regarding this assertion is 
worth while. 

The superannuation benefits promised under this system 
would not invariably be the proportion of salary that is re- 
garded as ideal. The percentages of salary to be deposited 
would be worked out so that, in the absence of serious eco- 
nomic or administrative changes, they would produce the de- 
sired benefit only in the average case, but no one would have 
been promised that exact benefit ; they would have been prom- 
ised what the accumulation to their account thus produced 
would purchase. The system would be constantly readjusting 
itself to changes, because the changes would affect the contri- 
butions which would in time affect the amount of benefit. A 
retirement system cannot be built rigidly, it must allow for 
some expansion and contraction arising from those changes 
in the economic temperature that take place from time to time. 
If the amount of benefit is firmly fastened to salary, the ex- 
pansion and contraction affect the financial stability of the 
system and endanger its strength. If the exact proportion 
of benefit to salary is left free to move slightly, the desired 
proportion can be secured within reasonable limits and the 
structure can be given greater financial stability. This play, 
moreover, will allow for administrative changes without in- 
justice, because the employees who profit from the changes can 

412 



CONCLUSIONS 



hardly demand fairly that their retirement benefits shall be 
increased in respect to services rendered before the changes 
take place. 

Under this system, moreover, the contributions are not put 
into a common pot to be gambled for, those failing to advance 
in salary at the average rate paying part of the cost of retire- 
ment allowances for their more fortunate brothers who do. 
The fortunate employee who advances more rapidly than the 
average gets precisely what his contributions and those made 
in his behalf will buy, and since it was assumed he would 
advance only at the averages rate, his superannuation bene- 
fit in proportion to his salary is smaller than that of his less 
successful fellow entrant. The employee who has worked 
along in a routine position without much advancement on 
the other hand finds that he has the largest benefit in propor- 
tion to his final salary of any of the retirers, because his ac- 
count has been receiving contributions figured on the basis 
that he would get average promotions, whereas in fact he 
has not. Socially this device is desirable, for in a quiet way 
with perfect equity to the employees it gives some recogni- 
tion to the well-established fact that the lower an employee's 
salary the higher the percentage of it required to provide the 
absolute necessaries of life. 

If the service to be covered has low-paid employees, some 
device has to be adopted to give recognition to their needs, 
as even if half active salary is established as the desired benefit 
in the case of the more highly paid men it will not take care 
of those whose wages are at or near the minimum of sub- 
sistence. To meet this requirement it would appear feasible 
to regard the ideal superannuation benefit as composed of two 
parts: (i) a certain fixed sum and (2) a certain portion of 
salary, the two together making the total allowance. For ex- 
ample, in a community where the minimum of subsistence for 
an aged employee and his wife was found to be approximately 
$600 a year and the wages of the lowest paid employees of 
the retirement age were $720, the actuary might be asked to 

413 



Contribu- 
tions Are 
Not Gam- 
bled for 



Ideal 
Benefit 
Composed 
of Two 
Parts 



RETIREMENT OF PUBLIC EMPLOYEES 

determine what percentage of salary would have to be set 
aside to provide in the average case an annuity at the retire- 
ment age 2 of $400 plus one-third average salary of the last, 
say, five years for the different ages at entrance. The deposits 
to the account of the employee would then be made on that 
basis. The employee in the $720 class would on retirement 
have provided himself with an annuity of $640 had he had 
normal advancement, whereas the employee in the $900 class 
would have $700, the employee in the $1,200 class $800; the 
employee in the $1,800 class, $1,000; and the employee in 
the $2,400 class, $1,200. Each, however, will have exactly 
what his contributions and those in his behalf will pay for, 
and these results would be produced only in the average case. 
Those who advance less rapidly will get larger benefits in pro- 
portion to their salaries, those who advanced more rapidly 
smaller benefits. 
Where is "Where," it may be asked, "is such a system in operation?" 

System in and the answer must be very frankly "nowhere." The device 
Operation described appears to be a possible development along the line 
laid down in the English Elementary School Teachers' De- 
ferred Annuity Fund, the Massachusetts System, Mr. Herbert 
D. Brown's plan for a Savings and Annuity System for Fed- 
eral Employees, and the Carnegie Foundation Plan for a Sav- 
ings and Annuity System for College Teachers. In the Eng- 
lish system the contributions are a fixed sum, in the Massa- 
chusetts system a fixed percentage alike to all, and in Mr. 
Brown's scheme a percentage varying with age at entrance 
and increasing with salary advancements. This scheme sug- 
gests the use of the salary scale to make the percentage de- 
ductions uniform throughout service, thereby avoiding high 
retents from late promotions and the combination of the fixed 
sum and the proportion of salary in arriving at the percentage 

2 It would probably prove advisable so to calculate the percentages 
that would have to be deposited, that the $|oo would become available 
at the minimum permissive retirement age, whereas the full amount 
of the salary addition would only be available at the compulsory age. 

414 



CONCLUSIONS 

deduction to provide suitable minimum allowances, and as will 
be subsequently explained to facilitate correlation with a disa- 
bility benefit. It has seemed to the writer that along this line 
lies the solution of the superannuation retirement problem 
rather than along the line of benefits directly proportional to 
salary. The important point is to connect benefits and the 
amount available to pay for them, rather than to connect 
salary and benefits and to run the risk of endangering the 
financial stability of the system, of interfering with changes, 
and of dealing unfairly by the less highly paid classes. 



The Amount of Superannuation Benefits in Relation to 
Economic Need. The exact amount of the superannuation 
benefit which ought to be provided constitutes a question re- 
garding which few specific conclusions can be drawn. For 
the employee who has spent his life in the service the general 
rule would seem to be that the benefit should be not less than 
the minimum of subsistence for an employee of the com- 
pulsory superannuation age and his dependents at that age, 
nor should it exceed a sum' which will purchase the necessaries 
of the employee's standard of life at that age. In highly ath- 
letic services, however, where the assumption is that the em- 
ployee will take up some other business on retirement it may 
be questioned whether full minimum of subsistence should be 
paid. If the employee has been incapacitated for further work 
by the service the retirement allowance should of course sus- 
tain him, but if he is still capable of working it is questionable 
whether the allowance under a compulsory system should be 
made high enough to permit the employee to live in idleness. 

In the compromise regarding amount of superannuation 
benefit which must be reached between the government, the 
employees, and the public, the fact must always be kept clearly 
in mind that the retirement allowances are part of compensa- 
tion. What the public pays for the services in a department 
having a retirement system is immediate wage plus the cost 
of the retirement allowance. The concern of all parties is 

415 



Not Less 
Than the 
Minimum 
of Sub- 
sistence 



Retirement 
Benefit and 
Immediate 
Wage Must 
Be Cor- 
related 



RETIREMENT OF PUBLIC EMPLOYEES 

to have these two items of compensation properly correlated, 
and care must be continually exercised lest a system be estab- 
lished which directly or indirectly takes too large a proportion 
of a man's earnings in his active years to provide a larger 
benefit than he will need in his old age, when his family re- 
sponsibilities are greatly diminished. This result can easily 
be produced if the legislators and administrative officers will 
consent to a consideration of the retirement problem as some- 
thing entirely apart from the compensation problem. When 
the retirement system alone is being considered the natural 
object of the employee is to work for maximum benefits, 
especially if the system is non-contributory. If a vote of the 
employees were taken, however, as to their choice for a 
smaller benefit and more immediate wage or a larger benefit 
and a less immediate wage, they would probably prefer the 
larger immediate wage by heavy majorities. 

Equal The Amount of the Disability Benefit The amount of the 

Protection disability benefit presents many problems that are distinct from 
Payments those involved by the superannuation benefit, and yet the two 
are in many respects alike. The objections to a disability 
benefit directly dependent on salary are essentially the same 
as those to a superannuation benefit thus determined. On the 
other hand, the method of basing the disability benefit solely 
on the purchasing power of accumulations to an individual's 
account is entirely impracticable. Disability benefits must be 
provided on a collective or an insurance basis, those escaping 
disability paying for the benefits of those who do not. To 
give absolute equality of return to each employee is therefore 
out of the question, but it is possible to give each employee 
equal protection for equal payments. This result can be ac- 
complished by the device of having each employee insured 
against disability for a certain sum, varying the premium ac- 
cording to the cost of that insurance at the employee's age 
at entrance, or by the device of having each employee pay a 
certain amount for disability insurance and determining the 

416 



CONCLUSIONS 

amount of the insurance by the purchasing power of this pre- 
mium. The employees may, if it is so desired, be divided into 
classes according to entrance salaries, or according to service 
classes, or according to any other definite index available at 
the time of entrance into the service, and the amount of in- 
surance to be carried or the amount of premium to be paid 
can be varied for each of these classes. It might prove feasible 
on promotion to require an employee to take out additional 
disability insurance at the premium for his age at promotion. 
The point is to have him insured for a definite amount at a 
definite premium, and not to have the premium fixed and have 
the amount depend on his salary advancement. 

If the superannuation benefit is provided on the savings Composed 
and annuity basis and consists, in the average case, of a fixed p arts w ° 
sum plus a selected proportion of salary ($400 plus one-third 
salary was used for illustrative purposes on page 414), the 
disability benefit could apparently well be made $400 plus 
such an annuity as the accumulation standing to the em- 
ployee's credit toward a superannuation benefit would pur- 
chase. A provision would probably have to be included, how- 
ever, that in no case should the amount of the disability allow- 
ance granted exceed the amount of the superannuation allow- 
ance which would have been available had the employee re- 
mained in the service at the salary he was drawing at the time 
of disability, until the minimum superannuation age. Such a 
provision would probably be applicable to any individual em- 
ployee only for a few years immediately preceding the min- 
imum superannuation age. Then the accumulation toward a 
superannuation benefit would be a substantial sum, and since 
the cost of annuities is less for disabled lives than for super- 
annuated lives, it would generally happen, if such a provision 
were not included in the law, that an employee could get more 
by retiring as disabled at fifty-nine than he could by remain- 
ing until sixty and retiring as superannuated. In some serv- 
ices it might even happen that in the absence of such a pro- 
vision a disabled employee as young as fifty-five could draw 

417 



RETIREMENT OF PUBLIC EMPLOYEES 

a larger annuity than if he had remained in the service until 
sixty and had then retired. Such an arrangement is unsafe 
because it offers too great a temptation to prove disability in 
those years in which the disability benefits subsequent superan- 
nuation benefits, and consequently the provision indicated 
seems necessary as a safeguard. 3 

Under such a disability provision any employee on disability 

3 Exactly how this provision shall be worked out by the actuary in 
fixing the premium rates to be charged is a perplexing question. The 
difficulty arises from the fact that not all the employees will be equally 
affected. If the provision were ignored in fixing contribution rates 
and the amount of benefits arbitrarily reduced, the lowest paid em- 
ployees generally speaking would suffer the smallest proportional 
deductions and the highest paid the largest. One device suggested has 
been to diminish the amount of the fixed sum insurance in the last 
few years, but this procedure is open to objection because it will not 
provide satisfactorily for the less highly paid employees who will have 
comparatively small accumulations and who depend almost entirely 
on the fixed sum provision to carry them up to the minimum of sub- 
sistence. Another possible device would appear to be to calculate what 
the savings through such a provision would be in the average case, 
and to reduce the premium for disability insurance on the assumption 
of these profits. A third device is non-actuarial. It would involve cal- 
culating the premium rates on the basis that no deductions would be 
made. When an employee was retired as disabled the actuaries would 
figure what his benefits would have been had no such provision been 
in force, and then what they would have been had he remained until 
the minimum superannuation age with no change in salary. If the 
superannuation allowance is smaller, such part of his accumulation 
as is necessary to purchase an annuity of that sum shall be so applied 
and the balance carried to a special surplus account. Annually the 
funds in this surplus account would be utilized to purchase additional 
annuities for all disabled employees who are in receipt of annuities 
of less than a certain fixed amount, being distributed among them on a 
per capita basis, with the provision that when an employee's annuity 
has been brought to the fixed amount, he shall not share further in the 
distribution. In case all annuities had been brought to this amount, 
the surplus would be applied to raise the level of the minimum annui- 
ties paid. The recipients of the smallest annuities will in general 
be those disabled in comparatively early life before their accumula- 
tions toward superannuation retirement have become sufficient to pur- 
chase any considerable increment to the fixed sum disability insur- 
ance. Another possible device is to make the fixed insurance against 
disability somewhat lower than the fixed portion of the superannua- 
tion retirement allowance, providing, say $360 as the amount of the 
disability insurance and $420 as the fixed portion of the superan- 
nuation allowance. 

418 



CONCLUSIONS 

would be assured of a minimum annuity of the fixed amount, Minimum 
which should be approximately the minimum of subsistence £ n u 1 "j lty 
for the employee as an individual. For many years the an- to Min- 
nuity would be substantially the whole allowance, because the subsistence 
increments purchasable by the superannuation accumulation 
would be small. As the later years of middle life were ap- 
proached, the amount available as a benefit would increase 
at a constantly accelerating rate until some few years before 
the minimum superannuation age it would reach the level of 
the minimum superannuation benefit and remain there. Per- 
sons genuinely disabled would have no particular incentive 
to remain in the active service, for it would be some few years 
before they could retire with any greater benefit. Persons 
anxious for leisure might be tempted to leave if they could, 
but they would face the rigid medical examination and the 
periodical grants of the disability benefit, whereas if they 
waited for a few years they would have no examination, no 
periodical grant, and a chance for an increased benefit. Al- 
though such a system may present some actuarial difficulties 
in calculating premiums, it appears on its surface to have 
many social and administrative advantages, and at the same 
time to be financially sound and substantially equitable as be- 
tween different classes of employees, since it gives for the 
superannuation benefit equality of return and for the special 
or fixed sum disability benefit equal protection for equal pre- 
mium. 



The Amount of the Withdrawal Benefit. The reasons for 
the conclusion that a benefit in event of withdrawal from the 
service is desirable and that no distinction should be made 
between resignation and dismissal have already been set forth 
in this chapter (on page 391). The conclusion that benefits 
are part of compensation for service, carried to a logical ex- 
treme, leads to the further conclusion that the employee has 
an equity not only in the contributions which he himself makes 
to the retirement system, but also in those which the govern- 

419 



Employee 
Has an 
Equity in 
Government 
Contribu- 
tions 



RETIREMENT OF PUBLIC EMPLOYEES 

ment makes in his behalf. They are all earned by the service, 
and consequently it would seem to follow that on withdrawal 
the employee should be entitled to the whole amount except 
in so far as any part of it has been expended in furnishing 
him with protection which he has already enjoyed. Since dis- 
ability benefits are necessarily provided on the insurance basis 
— those who escape disability contributing for those who do 
not — it is absolutely unfair that a retiring employee should 
demand any return of that part of his contributions which 
have already been expended in providing a disabled employee 
with such a benefit as he himself would be receiving had he 
been the unfortunate one. Payments toward a special benefit 
in the nature of a life insurance policy are in the same class. 
So far as the employee has already received protection and 
enjoyed it, he should pay for it, but in so far as he has been 
forced to accumulate part of his compensation to provide a 
reserve for protection which he is to receive in the future 
he seems to have an equity that should lead to the return of 
the whole amount thus accumulated whether it has been con- 
tributed by the government or by the employee. 
Binding The argument is sometimes advanced that the government 

ployeeaBad contributions, although part of compensation, is a special pay- 
Practice ment for long services promised upon condition that the em- 
ployee will remain with the government until the retirement 
age unless death or disability intervenes. A life contract be- 
tween a private employer and an employee would not be sus- 
tained in the courts, as it is recognized as against public policy 
that a man shall bind himself to serve a single employer for 
more than a reasonable time. The same public policy would 
seem to make objectionable a contract any part of the con- 
sideration for which was conditional upon life sendee to the 
retirement age. Retirement systems cannot at the same time 
be adequate social insurance systems acceptable to an enlight- 
ened public and devices for binding an employee to the gov- 
ernment upon penalty of a forfeiture of any part of the em- 
ployee's accumulated provision against old age or against fu- 

420 



Benefit 



CONCLUSIONS 

ture disability or against death. The public has generally- 
sought to preserve freedom of contract and the mobility of 
labor. It seems, therefore, that, although most retirement 
systems at the present time provide for a forfeiture of the 
whole or a part of the contributions of the government in 
event of resignation or dismissal, the practice is bad from 
the point of view of the public and that where the interests 
of a single employing government and of the public at large 
conflict the interests of the public should prevail. The benefit 
on withdrawal, it would seem therefore, should be the accu- 
mulation toward the superannuation benefit and the reserve 
accumulated in respect to disability insurance or any special 
life insurance benefit. 

The argument that withdrawal benefits encourage resigna- Deferred 
tions is not unf requently advanced ; it is said that certain em- 
ployees will leave the service simply to secure immediate pos- 
session of their funds. If this fear appears reasonably well- 
founded, after careful consideration of the type of the em- 
ployees involved, the difficulty can be met by requiring that 
the accumulations to the credit of an employee cannot be with- 
drawn on resignation or dismissal, but must remain in the 
fund until the employee reaches the minimum superannuation 
age, when they will be utilized for the purchase of an annuity, 
or until his death if the employee dies before the minimum 
superannuation age when they will be paid to his personal rep- 
resentative. 

The Amount of the Benefit: Death in the Active Service. 
In event of death in the active service from causes not directly 
due to the actual performance of duty, the minimum benefits 
should be the accumulations to the account of the deceased 
employee, with the compound interest, whether these accumu- 
lations have resulted from the employee's own contributions 
or from contributions made by the government in his behalf. 
Any smaller benefits will make it appear that the system de- 
rives a profit from the death of a member and will result in 

421 



RETIREMENT OF PUBLIC EMPLOYEES 



Objections 

to a 

Widows' 

and 

Orphans' 

Fund 



Life 

Insurance 
Benefit 



friction. The benefit in event of death is, moreover, of great 
importance to society since the great majority of employees 
dying before the minimum superannuation age leave depend- 
ents who must be supported. 

The weight of the evidence is, however, overwhelming 
against the establishment of a widows' and orphans' fund, be- 
cause the benefits are part of compensations and must be dis- 
tributed among the employees according to the value of their 
services and not according to the number and character of 
their dependents. The value of a widows' and orphans' fund 
is very different to different employees, and very different to 
the same employee at different periods of his life. No device 
for distributing or assessing the costs with even an approxi- 
mation to equity has been suggested, and accordingly the con- 
clusion seems fully justified that benefits in event of death 
in the active service should be payable to the personal repre- 
sentative of the employee to be distributed by him as the em- 
ployee may direct, or as the law may direct. 

Many persons advocate the inclusion of a special life in- 
surance benefit in the system, either to take the place of the 
mere return of contributions or to be over and above the 
mere return of contributions. The differences in the family 
responsibilities of different men and of the same man at dif- 
ferent periods of his life are, however, so great that it seems 
inadvisable to extend thus far the feature of compulsion. The 
inclusion of optional life insurance benefits purchasable by 
the employees at cost seems a highly desirable feature of a 
retirement system, because (i) it would encourage the carry- 
ing of adequate life insurance, (2) it would enable the em- 
ployees to insure cheaply, and (3) it would add to the stability 
of the fund. A system that sells only annuities runs risks 
from social changes that tend to prolong life. If that system 
adds a life insurance feature it can face such changes more 
securely for losses in the annuity department through in- 
creased longevity will be offset in part by gains through de- 
creased mortality in the life insurance department. Optional 

422 



CONCLUSIONS 

life insurance benefits, if offered, should probably lay special 
stress on term insurance policies in comparatively small units. 
By offering term policies for various terms in small units, the 
system should enable the employees so to supplement their 
regular allowances that they and their families will be reason- 
ably protected against all the more important contingencies 
of life. The important point in dealing with death benefits 
of all kinds is to preserve flexibility. 

Amount of Benefits: Death After Retirement. Flexibility 
in the case of death after retirement on a superannuation bene- 
fit can probably be best secured by the device of offering op- 
tional modes of settlement for choice at the time of retirement 
as follows: 

i. For the man without dependents or for the man where 
dependents are adequately provided for, an annuity for his 
life with no payments in event of his death. 

2. For the man with his wife only to consider, a last sur- 
vivor annuity payable to him or to his wife so long as either 
of them shall live. 

3. For the man who has one or more children still depend- 
ent, an annuity payable to him as long as he shall live, with 
the provision that if he shall die before his youngest child is 
eighteen, payment shall be continued to his family until the 
youngest child is eighteen. Eighteen is of course used here 
only for the purpose of illustration. Other ages could be used. 

In each case the amount of the annuity would depend on 
the amount available to the employee's credit on retirement. 
This sum he could apply as he chose, buying with it so much 
annuity as it would purchase under any one of the three 
classes. 

Amount of Benefit: Death or Disability in Actual Perform- Cost 
ance of Duty. The general conclusions reached regarding or- £ ho " ld 

. . . . . & ° Be Borne 

dinary disability, death in the active service from ordinary by the 
causes, and death after ordinary superannuation or disability 

423 



Government 



RETIREMENT OF PUBLIC EMPLOYEES 



Not a 

Serious 

Financial 

Problem 



In Relation 
to Salary 



Classes of 
Dependents 



Partial 
Disability 



retirements are not as a rule applicable to cases in which the 
death or disability is due directly to the actual performance 
of duty. In the case of service accidents and diseases, the 
government is directly responsible for all costs. Although 
economic forces may tend to shift part of the cost benefits 
to the employees, it is highly desirable that in the first instance 
the whole cost shall be borne by the government and in so 
far as possible shifted to the consumers of the service. The 
benefits in event of these contingencies are not to be thought 
of as parts of the regular wages or salaries of each employee 
but as being in the nature of compensation for injury done 
or as liquidated damages. The question of the equitable dis- 
tribution of the assets of a fund arising from direct or indi- 
rect contributions from active salaries or wages does not 
therefore demand consideration in dealing with this problem. 

In the ordinary service, moreover, service accidents and 
diseases ought not to be, and probably are not, sufficiently 
numerous to constitute a serious financial problem. Even if 
a reserve has been established for meeting liabilities from this 
source, the state should not be seriously inconvenienced by 
economic and administrative changes which might tend to 
bring the actual liabilities above the estimated liabilities. 

For these reasons it would seem that a benefit directly pro- 
portioned to salary is not objectionable as a device for pro- 
viding for death or disability directly resulting from the actual 
performance of duty. In the case of death due to the actual 
performance of duty much may be said in favor of the 
widows' and orphans' fund, as the widows and orphans are 
the ones damaged and entitled to compensation. 

Whether the benefit is based on salary or on the number 
and type of dependents, provision must be made in the law 
for defining the classes of dependents who will be recognized 
as entitled to benefits in event of the death of the employee. 

In case of disability due to the actual performance of duty 
the law should also make provision for partial disability even 
if the injured employee is given other employment under the 

424 



CONCLUSIONS 

government. A clause should, however, be included in the 
law that the sum of the salary earned by the disabled employee 
and the amount of his special service disability allowance shall 
not exceed his earnings in the position from which he was 
retired as disabled. 

Correlating the special benefits in event of service accidents Correlating 
and diseases with the other benefits provided by the system Benefits 
is a problem that deserves brief mention in this chapter. In 
the event of death or disability resulting from the actual per- 
formance of duty, shall the employee receive the benefits 
which would have been paid had the contingency happened 
from ordinary causes and in addition the special service-acci- 
dent or disease benefit, or shall he receive only the special 
service accident or disease benefit? In so far as the benefits 
are organized on the collective or insurance basis — those es- 
caping a contingency providing for those who do not — the 
conclusion seems reasonably clear that the special service ben- 
efit only should be paid. This benefit should provide reason- 
able protection; and the employee should not be compelled, 
directly or indirectly, to insure against a contingency against 
which he is already protected. Since the social and economic 
needs of the employee and his family are essentially the same 
on the happening of a given contingency, whether it happens 
from one cause or another, the object should be to give rea- 
sonable protection against the contingency, however it hap- 
pens, rather than to give exceptionally high benefits if it hap- 
pens in a particular way. The reasoning would extend to the 
correlation of the benefit in event of death in the performance 
of duty with a compulsory insurance against death from ordi- 
nary causes and possibly even to correlation with optional in- 
surance against death from ordinary cause. 

If the system permits the employees to take out life insur- Options 
ance with it in optional amounts, it might be well, if service 
accidents and diseases are numerous, to offer two types of 
policies, the cheaper payable only in event of death from ordi- 
nary causes, the more expensive payable regardless of cause. 

425 



RETIREMENT OF PUBLIC EMPLOYEES 



Individual 
Savings 
Shall Be 
Paid in 
Addition 
to Special 
Benefits 



The wise employee, appreciating that the system already gave 
his dependents reasonable protection in event of death in the 
actual performance of duty, would spend what he could spare 
for life insurance for the cheaper policy as he could thereby 
purchase more protection of the kind that the system did not 
give him. 

If the superannuation benefit has been provided on the in- 
dividualistic savings and annuity basis, in which no element 
of collectivism enters until the employee's accumulation has 
been invested in an annuity, the question of correlation be- 
comes, Shall an element of collectivism be introduced, by pay- 
ing only the special benefits in event of a service accident or 
disease and distributing the employee's accumulation in re- 
spect to superannuation among the other employees upon some 
equitable basis? The amount of the probable accruals from 
this source would of course be estimated in advance, and the 
rates of contributions fixed in anticipation of them. Such 
a device would undoubtedly be highly unpopular because un- 
der the savings and annuity system the employees regard their 
accumulations as being absolutely their own property and they 
would regard the proceeding as arbitrary. The amount taken 
from different employees would of course be different in dif- 
ferent cases and that fact would give rise to friction. The 
accumulation on account of superannuation, in a savings and 
annuity system, should apparently therefore remain personal 
and individual and be paid in addition to any special service 
accident or disease benefits. 



Affected by- 
Contin- 
gencies 
Covered 



The Cost of a Retirement System 

The aggregate cost of a retirement system is, of course, 
profoundly affected by the decision regarding the contingen- 
cies to be recognized as warranting benefits. A system offer- 
ing superannuation benefits only and requiring forfeitures in 
event of death, resignation, or dismissal, is, other things being 
equal, vastly cheaper than a system which recognizes the rights 
of the employees under all contingencies. In these conclusions, 

426 



CONCLUSIONS 

the old legal maxim, "Equity abhors a forfeiture" has been 
accepted as applicable to retirement systems ; and it has been 
recommended that on no contingency shall an employee lose 
anything. The system recommended is naturally therefore 
expensive, and is preferred on the ground that modest pro- 
vision against all contingencies is better than large provision 
against certain contingencies and no protection against others. 

Since the selection of contingencies to be provided for is Three 
expensive, the founders of the system must economize in other Econ- 
directions to avoid heavy direct or indirect retents from the omizin g 
employee's immediate compensation. Three major lines 
should be followed in economizing. 

i. Every reasonable precaution should be exercised to pre- 
vent unnecessary or fraudulent disability retirement. 

2. The superannuation retirement ages should be placed as 
high as can be done without jeopardizing the success of the 
system; and no person should be permitted to retire without 
proving disability due to accident or disease before he has 
reached an age at which superannuation may be reasonably 
presumed. 

3. Modest benefits only should be provided. 

Once again emphasis must be placed on the fact that retire- Objections 
ment systems are not devices to provide leisure for able-bodied Benefits 
employees still capable of performing their duties; they are 
insurance devices to take care of employees who through acci- 
dent, disease or advancing age are unable to continue in active 
service. The cost of this insurance is borne directly or indi- 
rectly by the employees. In the case of disability, those who 
escape pay for those who do not; in the case of superannua- 
tion, the employee gives up some of his earnings in early life 
to have them available later. In each case the reasons against 
excessive benefits are strong. The able-bodied and effective 
should not be taxed to provide more than modest provisions 
for the disabled; the young or the middle-aged man should 
not be required when his family responsibilities are at their 
maximum to put aside any more than is necessary to protect 

427 



RETIREMENT OF PUBLIC EMPLOYEES 



his old age; and it must be remembered that an old 
wants but little here below nor wants that little long." 



man 



Differences 
in Cost 
With 
Regard to 
Age, Sex, 
Occupation 



Distribution of Cost Among Individuals. To deal equita- 
bly between different classes of employees and between dif- 
ferent employees of the same class, the fact must be recog- 
nized that the cost of benefits, per dollar of the amount al- 
lowed, generally varies greatly as between different employees 
and classes of employees. If a uniform compulsory superan- 
nuation age is established, the cost, per dollar of superannua- 
tion benefit, is greater for the late entrant than for the early 
entrant. The cost of such a benefit is generally greater for 
women than for men, and not infrequently it is greater for 
the employees in one line of work than for those in another. 
In a system of so-called "free pensions" — in which all the 
costs of the benefits are borne in the first instance by the gov- 
ernment — failure to recognize the differences in cost by off- 
setting variations in the amount of benefits granted is an in- 
equitable practice, since it produces inequalities in the aggre- 
gate ultimate compensation paid different employees for the 
same services. To repeat an illustration formerly used, if 
two employees are working side by side, each doing the same 
work equally well, at the same immediate wage, with the same 
prospect of superannuation retirement at the fixed age, the 
government pays in the aggregate less to the man who has 
served it the longer, because the retirement allowance which 
it will give to him costs it less per hour of service rendered 
than does the allowance it will pay the later entrant. If one 
employee is a woman and the other a man it is probably pay- 
ing the woman more than the man even if both entered at 
the same age and are receiving the same salary, because an 
annuity for a woman at the compulsory retirement age will 
cost more than an annuity for a man at that age. Even un- 
der a non-contributory system, supported wholly by the gov- 
ernment, considerations of equity would seem to demand 
that variations in cost due to age at entrance, sex, or occu- 

428 



CONCLUSIONS 

pation should be offset by variations in the amount of benefit. 

Under a system in which the costs are assessed in the first increasing 
instance wholly or partially against the employees, the case Contribu- 
tor establishing a definite relationship between amount of ben- Reducing 
efit and cost of benefit is perhaps more apparent, but it hardly 
seems as if it were any stronger. If the benefits under a non- 
contributory system are in fact deferred pay, as most students 
of retirement legislation now agree, the equities between the 
employees are precisely the same whether the system be en- 
tirely non-contributory or wholly contributory. The em- 
ployees in the last analysis pay for the benefits under either 
system. Under the non-contributory system the only device 
for doing justice is that of reducing benefits in proportion to 
cost. Under a wholly or partially contributory system one 
can combine two devices, increasing payments made by the 
employee in proportion to the cost in his particular case and 
reducing benefits so that he may afford to pay the cost. 

The Division of Costs Between Government and Em- 
ployees. The way is perhaps now cleared for a statement of 
the conclusions which seem to be the sound ones on that 
mooted question, "Shall all the costs be borne in the first in- 
stance by the government, or shall the whole or a part of them 
be assessed against the employees?" The conclusion has al- 
ready been explained that the decision of this point does not 
determine the ultimate incidence of the cost in respect to 
future entrants, because that incidence is determined by forces 
lying beyond the control of the founders of the system. Nor 
does the decision on this point determine what benefits shall 
be granted, for the desired benefits can be granted under any 
system. The only peculiar merit of the non-contributory sys- Non-con- 
tem is that it involves no cost of collecting contributions, and t^b" 10 ^ 
hence it would be cheaper to administer. The value of this 
advantage can, however, be greatly overemphasized, for if 
a non-contributory system is scientifically administered and 
is devised with due consideration of the equities of the em- 

429 



RETIREMENT OF PUBLIC EMPLOYEES 



Contributory- 
System 
Preferred 
for Future 
Entrants 



ployees it will probably cost substantially as much to adminis- 
ter as a contributory system. 

A system requiring the employees to contribute all or a por- 
tion of their retirement allowances from their salaries seems 
infinitely to be preferred to a wholly non-contributory system 
for future entrants for the following reasons : 

I. It forces all parties, the government, the employees and 
the public to recognize the fact that retirement allowances are 
not benevolent grants nor rewards for meritorious conduct, 
but are part of the employee's compensation for services ren- 
dered, paid in this form for the common advantages of the 
government, the employee and the public and hence 



a. The government will have to recognize that any move- 

ment to reduce benefits is a movement not to curtail 
a charity but to reduce compensation. 

b. The employees can take their benefits with no greater 

danger to their moral fiber than is involved in ac- 
cepting their salaries. 

c. The public will regard the retirement problem as one 

of compensation and not one of special privilege to 
a particular class. 



2. It tends to prevent the employees from organizing to 
secure increases in retirement allowances without considera- 
tion of cost, and hence lessens the danger of establishing a 
''pension graft." 

3. It facilitates the development of an equitable and ade- 
quate system. L'nder a non-contributory system, the equities 
of an employee can be recognized only by varying benefits in 
proportion to cost. Under a wholly or partially contributory 
system, the equities can be recognized both by varying bene- 
fits and by varying contributions. Optional benefits can, more- 
over, be best provided for under a contribution system. 

4. It leads almost inevitably to the establishment of a fund 
and ultimately to its operation on an actual reserve basis. 

43° 



CONCLUSIONS 

With some misgivings and mental reservations, the writer Partially 
is inclined to conclude that the partially contributory system ut o" y rl S y Stem 
is to be preferred to the wholly contributory, on two grounds, Preferred 

,..,.,. . • i , i to Wholly 

first that it simplifies correlating the temporary system de- Contrib- 
vised for present employees with the permanent system de- utory 
vised for future entrants, and second, that it gives recogni- 
tion to the fact that the government and the employees are 
mutually interested in the success of the system. The danger 
of this distribution of the cost is, however, that many per- 
sons will regard the part of the cost borne by the government 
as being in the nature of a charitable grant. If in establishing 
a retirement system, a new salary scale could be adopted for 
future entrants, distinct from that for present employees, from 
which new salaries the entire cost of benefits would be de- 
ducted in the case of future entrants, whereas the old salary 
scale would be left for present employees who must anyway 
receive part of their benefits at the expense of the government, 
a fairly definite conclusion could be drawn in favor of the 
wholly contributory system for future entrants. The fact 
that the salaries were raised in lieu of contribution by the 
government would of course have to be definitely stated in 
the pamphlet descriptive of the system, with which every em- 
ployee should always be supplied on entering a service in 
which retirement benefits are provided. 

Under a partially contributory system, the government's 
contributions, it would seem, should be either the same amount 
for each employee or the same proportion of salary for each 
employee. Those differences which arise in cost of benefits 
from personal differences between employees should result in 
differences between what individuals pay for their own allow- 
ances and not in differences in what the government pays in 
their behalf. 

The basis of division between the government and its 
future employees should probably be determined for the em- 
ployee of the typical entrance age. Individual employees 
should pay the difference between the total cost of their al- 

431 



RETIREMENT OF PUBLIC EMPLOYEES 



Half and 

Half 

Division 



Suggested 
Method of 
Salary 
Deductions 



lowances and the amount paid by the government for the 
typical employee. 

The half and half division with the typical employee has 
the merit of apparent fairness and simplicity. It would doubt- 
less be just, however, to recognize the difference in the in- 
terests of the parties in the different benefits, and have the 
government bear more of the cost for superannuation and 
disability benefits than for benefits in event of death in the 
active service from ordinary causes, or in event of with- 
drawal. Benefits in event of sendee accidents or diseases 
should be borne entirely by the government, whereas optional 
benefits should be paid for wholly by the employee. 

To simplify accounting and to facilitate the granting of 
optional benefits, the English practice of paying a smaller 
fraction than one-twelfth of salary monthly or of one-twenty- 
fourth semi-monthly should probably be adopted. From the 
amounts thus withheld from the employee the retirement sys- 
tem managers would then quarterly or semi-annually deduct 
such sums as the employee owed the system and pay the bal- 
ance to the employee like an insurance dividend. If these 
balances were payable semi-annually or June i and Decem- 
ber i the system would have its obvious advantages in pro- 
viding vacation or Christmas money for those who so chose 
to use it. 4 

Indirect Contributions by Government. Whatever basis is 
settled upon for dividing the special costs the government 
ought to make the following indirect contributions : 

i. The expenses of management. 

2. Such sums as may be necessary to bring the earnings of 

4 In mentioning this system the writer has always referred to it as 
the English system. Before he knew it was in use in England, it was 
suggested to him by Mr. George B. Buck, Actuary of the Mayor's 
Pension Commission of New York, as an entirely feasible method of 
overcoming the objection to salary retents. Under this system the 
existing pay-roll machinery is in no way affected. New pay tables are 
prepared substituting a fraction of say one-sixteenth for one-twelfth 
in fixing the amount of a monthly check. 

432 



CONCLUSIONS 

the fund up to the rate of interest used in making the 
computations to fix premiums or contributions. If a 
reasonable and conservative rate of interest is assumed _ 
this guarantee should be purely a contingent liability 
under which the government will never be called upon 
to make heavy contributions. 
3. The government should guarantee the solvency of the 
system, making good such deficiencies as may arise 
from mistakes which it made in establishing this sys- 
tem. 

Regarding the conclusion in favor of a government guar- Guarantee 
antee of the solvency of the fund, a word or two of explana- 
tion should be given. The consideration which the govern- 
ment offers for services is composed of two principal parts : 
(1) immediate wages and (2) benefits under the retirement 
system. No one would argue for a moment that the govern- 
ment should refuse to pay the wage actually promised an em- 
ployee because some expert employed by the government had 
made an error in his calculation whereby the work which the 
employee was called upon to perform was costing more than 
was expected. The same reasoning would seem to be even 
more applicable to retirement benefits, because in the absence 
of a governmental guarantee the damage sustained by the 
employee through an error in calculations may be irreparable. 
Failure to pay promised wages becomes apparent compara- 
tively soon, and the employee can seek other employment, but 
failure to pay promised retirement benefits does not become 
apparent until some employees are already old and then they 
cannot make other provisions. The doctrine of caveat emptor 
can scarcely be applied to employees purchasing retirement 
benefits by their services ; it cannot fairly be said to the em- 
ployee connected with a bankrupt compulsory fund, "You 
knew the terms of the retirement law ; you should have known 
that the assets provided were insufficient to meet liabilities." 
Few employees have the technical knowledge to tell whether 

433 



RETIREMENT OF PUBLIC EMPLOYEES 

or not assets will equal liabilities even if they had the funds 
and the opportunity to make the fairly elaborated and costly 
actuarial computations necessary to determine that fact. The 
credit of the government should be pledged to make good its 
own miscalculations in retirement benefits just as it is pledged 
to make good its own miscalculations in matters of wages. 
If the retirement system has been devised by the employees 
in the first instance and has been ratified by the government, 
the mistake of fact then becomes mutual in respect to the gov- 
ernment and those who were in the service when the system 
was established. Those employees have not so sound a case 
for a guarantee as have future entrants. A new scheme for 
future entrants, however, should always include a guarantee. 

The Organization and Management of Fund 

The Actuarial Fund Preferred. The system established 
should be operated on the actuarial reserve basis, that is to 
say, at the time sendees are rendered the government should 
pay all the obligations it has incurred in respect to these serv- 
ices, the immediate wage being paid to the employee in cash 
and the cost of the prospective retirement allowances arising 
from those services being paid into an actuarial reserve fund 
to be invested in approved securities until utilized, with the 
interest it will have earned, to pay the benefits as they mature. 
The rates of payment into the fund should be scientifically 
determined by a skilled actuary so that the amount paid into 
the fund at the time the services are rendered will be just 
sufficient with the interest it will earn to provide the benefits. 
Such a system is markedly superior to the assessments or cash 
disbursement system under which the government pays at the 
time the services are rendered only the immediate wage, and 
makes no provision for the payment of retirement claims un- 
til the employee has actually retired and then meets the charges 
from the current revenues of the state. The merits and de- 
fects of these two systems has been discussed at length in 
Chapter XV, and hence only the briefest summaiy of the four 

434 



CONCLUSIONS 



main reasons for preferring the actuarial reserve system will 
be given in these conclusions. They are as follows : 

i. The actuarial reserve system is equitable as between suc- 
cessive generations of taxpayers, because each generation 
pays all the obligations incurred for services rendered to that 
generation, whereas under the assessment or cash disburse- 
ment system the generation of taxpayers establishing the sys- 
tem pays little more than the immediate wage and subsequent 
generations pay the immediate wage for service rendered them 
and the retirement allowances for services rendered an earlier 
generation. 

2. The actuarial reserve system is businesslike and con- 
ducive to good management, because all obligations are re- 
corded when incurred and suitable provision is at once made 
for meeting them when they mature ; whereas under the assess- 
ment or cash disbursement system little consideration may be 
given the real cost of the service, the immediate wage only 
may be considered, and a large and unmeasured obligation 
may be passed on to the future with absolutely no provision 
to meet it. 

3. The actuarial reserve system tends to safeguard the sys- 
tem from popular and legislative misunderstanding and attack 
because it makes the amount of the burden fairly uniform 
from year to year, and since a considerable part of the re- 
quired payments are met by the interest earned from the fund, 
it makes the apparent burden, if not the real burden, ma- 
terially less. The assessment or cash disbursement system 
on the other hand lays the system open to popular and legis- 
lative misunderstanding and attack because for many years 
the burden on the taxpayers is a constantly increasing one, 
and since no interest is earned by any fund to supplement 
the direct amounts paid by the taxpayers, the whole cost must 
be collected directly from the taxpayers. 

4. The actuarial reserve system is adaptable. It easily 
meets the needs of a contributory system and it makes returns 
of contributions or their equivalent in event of death, resigna- 

435 



Equitable 
as Between 
Successive 
Generations 
of Tax- 
payers 



Conducive 
to Good 
Manage- 
ment 



Safeguard 
from 

Legislative 
Attack 



Adaptable 



RETIREMENT OF PUBLIC EMPLOYEES 

tion or dismissal easy, because the data for determining the 
amount due are already collected and tabulated and the re- 
serve fund accumulating at interest is the proper source from 
which to make such payments and they are immediately at 
hand and necessitate no special appropriation. The assess- 
ment or cash disbursement system is not thus adaptable. 

Necessary Safeguards. To guard against the possible dan- 
gers arising from the establishment of a large fund the law 
should provide 

1. The management of the fund by a nonpartisan board of 

trustees, the membership of which should be changed 
gradually, so that no single administration can, except 
in very exceptional cases, appoint more than a third of 
the number. 

2. For binding all officials directly responsible for handling 

the funds. 

3. For restricting the field in which funds can be invested 

so that the investments will be conservative and for 
limiting the amount that can be placed in any one way 
so that they will be properly diversified. 

An Actuary Required. The services of a properly qualified 
actuary will be required both in establishing the fund in the 
first instance and in operating it on a permanently solvent 
basis after it is once established. 
Duties of the In devising the system in the first instances the actuary has 
Actuary two i m p 0r tant duties to perform : ( 1 ) to fix the initial pre- 
mium rates and (2) to install an adequate system or records 
so that future actuarial valuations may be made accurately 
and cheaply. In subsequent valuations he has again two im- 
portant duties : ( 1 ) to determine the exact financial condition 
of the fund and (2) to make such changes in rates of con- 
tribution as are essential to maintain the fund in a constant 
state of solvency. 

436 



CONCLUSIONS 

The work of the actuary in valuing a fund which has al- Four 
ready been established involves four distinct processes : ^rocesses 

Valuation 

1. Determining by analysis the forces upon which the cost 

of the benefits depend. 

2. Determining by the collection and tabulating of data at 

what rates these various forces have been operating in 
the immediate past. 

3. Preparing rates, on the basis of those for the past, to 

show how the forces may be expected to operate. 

4. Determining the money values and premium rates by 

the use of these rates. 

When the actuary is called upon to establish a new fund 
he cannot get all the necessary rates from past experience, but 
he has to make a careful examination of all available data to 
indicate what rates to adopt from other funds to use for the 
first few years until special rates can be developed from the 
actual experience of the fund itself. Past experience has 
abundantly demonstrated that the experience of one fund can- 
not be used permanently in valuing another, for each fund is 
a law unto itself. One of the most important tasks before 
the actuary in establishing a fund in the first instance is to 
install a system of records that will facilitate the development 
of rates as soon as a sufficient body of data become available. 

This brief description of the actuarial work should be suffi- 
cient to distinguish it from accounting and to demonstrate 
that it is a special science. Legislators should no more under- 
take to develop a retirement system without expert actuarial 
advice than they should undertake to have an elaborate and 
costly bridge built without the services of an engineer. 

Treatment of Small Services. If the service for which a The State 
retirement system is desired is very small, too small to give for^malf 
scope for the operation of the rule of averages on which actu- Systems 
arial work depends, an actuarial reserve system is out of the 

437 



RETIREMENT OF PUBLIC EMPLOYEES 



A Single 
State 

System 



Insurance 
with 
Private 
Companies 



question for that service by itself. The ideal solution for 
such a problem is probably to get some central authority to 
bring together a group of small units in a single organiza- 
tion. The state, for example, could operate a retirement sys- 
tem for all the small local units, or for such of the local units 
as cared to cooperate. The state would then serve as the in- 
surance carrier while the local units bore the cost of retiring 
their own employees, by paying the necessary premiums to 
the state system. In developing such a system the equities 
as between different communities and classes of communities 
become a question for consideration, but in general this ques- 
tion is similar to that of the equities as between employees. 
It is vastly simplified by the establishment of a system giving 
equality of return in the superannuation benefit and equal 
protection for equal premiums in the disability benefit. 

Since the small local units cannot have separate systems, 
but must depend on the state for the establishment of a cen- 
tralized system, it would seem as if one system for the state 
as a whole would be preferable to independent systems for 
the larger communities and a state system for the units too 
small to provide for themselves. A single state system could 
be better administered for the same expenditure and it would 
permit of considerable movement of employees about the 
state. 

If the small community finds it impossible to get the state 
to serve as an insurance carrier, the only other solution is to 
make as good a system as possible through insurance with 
private companies. To get adequate protection against ordi- 
nary disability from a private company would probably prove 
very difficult if not prohibitively expensive. Provisions for 
superannuation and for life insurance can of course be made 
in this way, and the localitv should be able to secure consid- 
erable reductions in the premiums charged private individuals 
if it collects the premiums from the employees. Insurance 
with private companies appears, however, to be a makeshift 
provision to be turned to only as a last resort. 

438 



CONCLUSIONS 

Indirect Appropriations Undesirable. All appropriations 
made by the government for retirement allowances should 
probably appear in a single item in the appropriation act sup- 
ported by a schedule showing their distribution. All indirect 
contributions and permanent appropriations are bad. The 
system, for example, should never be given permanently a 
certain proportion of the excise taxes, nor the unexpended 
balance of certain appropriations, nor the income from the 
sale of condemned property, nor the fines for drunkenness, 
nor the fines imposed on police officers for infractions of po- 
lice rules. To a peculiar degree retirement systems demand 
that public control that can only come from keeping the facts 
continually in the light. 

Protecting System from Financial Indiscretion of Em- 
ployees. After all the machinery has been carefully worked 
out the public may still be left with a dependent ex-public 
servant to support in his old age unless proper precautions are 
taken to protect all parties from the financial indiscretion of 
retired employees. The general rule should be to pay super- 
annuation and disability benefits only in annuities, and if it 
is desired to prevent employees from withdrawing from the 
service for the sake of getting possession of their reserves 
under the system, their accumulation on withdrawal may be 
held to the retirement age and then paid as annuities. This 
rule should not, however, be applied to benefits in event of 
death, for in these benefits the important point is to preserve 
flexibility. 

The Present Employees 

The preceding discussion has related solely to the problems 
involved in devising a retirement system for the employees 
who enter the service after the system has been established. 
These future entrants, as they are called in retirement term- 
inology, are by far the more important class to be considered 
in planning a system, for its permanent success depends on its 
adequacy as applied to them. Provision for present employees 

439 



RETIREMENT OF PUBLIC EMPLOYEES 

is, however, a matter of grave importance and constitutes a 
distinct problem, requiring separate treatment. 

Six Differences Between Present Employees and Future 
Entrants. That separate treatment is necessary becomes ob- 
vious on reviewing the six principal differences that distin- 
guish the present employees from the future entrants. These 
differences relate (i) to their homogeneity, (2) to their eco- 
nomic relation to the retirement system, (3) to the period of 
social evolution in which they live, (4) to their desire for cer- 
tain benefits, (5) to their ability to pay for or to assist in 
paying for their benefits and (6) to their susceptibility to 
moral injury from free pension grants. These differences 
have been treated at length in the chapter on present em- 
ployees (pages 290300), but they are such essential elements 
in the retirement problem that a brief summary of the main 
points is worth while. 
Differences Each annual class of new entrants is obviously a strikingly 
Homogeneity homogeneous group. Although a few individual members 
of it may vary rather widely from the average in respect to 
age — and all that age implies in respect to marital conditions 
and general outlook on life — yet to describe an average mem- 
ber who would be fairly and reasonably typical of the whole 
group would not be difficult. For such a homogeneous group, 
a legislative body could plan with a high degree of defmiteness 
and certainty. The present employees on the other hand are 
a heterogeneous collection of the survivors of all the differ- 
ent entrance classes of the last fifty years or more, if the serv- 
ice has been in existence that long. They vary in age from 
the dean of the service to the youngest new entrant, and these 
differences in age carry with them differences in marital con- 
dition, family responsibilities, earnings, and so forth. Legis- 
lating for a heterogeneous group of present employees is in 
some ways a far more complex problem than legislating for 
a homogeneous group of new entrants. 

The future entrants, it has been seen, earn their benefits by 

440 



CONCLUSIONS 

their services and hence the problem in devising a system for Differences 
them is to work out a well-balanced adjustment between pay- e^,,,,^ 
ments for immediate consumption and deferred payments to Relation 

. , . , . ., , , .to Retire- 

provide against the various possible untoward contingencies m ent System 

to which the employee is exposed. Economically, it is all a 
question of compensation or wages. The economic relation 
of present employees to the system cannot be so summarily 
disposed of because the employees are not a homogeneous 
group. Two distinct classes must be recognized : ( i ) those 
who will be retired immediately upon the adoption of the sys- 
tem and (2) those who will be retained and will render serv- 
ice after the adoption of the system. The services of this 
second class must be divided into (a) that rendered prior to 
the adoption of the system and (b) that rendered subse- 
quently. 

So far as the employees are concerned, the benefits paid 
in respect to past services to those who are retired immediately 
upon the adoption of the system partake of the nature of 
gratuities. The only ground apparently upon which the em- 
ployees may claim them as of right is that they are liquidated 
damages paid to them by the government to compensate them 
for the loss of that prospect of retention in the service so 
long as they were able to fulfill the minimum attendance re- 
quirement which was theirs when they entered it, and which, 
under the name of permanency of employment, or perma- 
nency of tenure, may have been one of the inducements to 
enter and to remain in it. The employees may allege that the 
government, having taken from them the opportunity to work 
until late old age, compensates them by providing for all old 
age insurance. Obviously this claim has no legal validity 
and it has no ethical validity unless compulsory retirement 
provisions are established and enforced. Thus its weight 
would turn on the rigidity of these requirements and on the 
actual conditions that prevailed in the service prior to the 
adoption of the system. 

Benefits for past services to present employees who remain 

441 



RETIREMENT OF PUBLIC EMPLOYEES 



Differences 
as to 
Period 
of Social 
Evolution 



on the active rolls after the system is established may operate 
as an inducement to certain individual employees to remain 
in the employ of the government, who would otherwise have 
resigned. In such instances, these benefits partake of the na- 
ture of lump sum awards for continuous service. They are 
earned by the employees perhaps, although they are not earned 
from day to day as in the case of benefits for future services. 

Benefits for future services tend to become part of the com- 
pensation for services rendered. At the moment the retire- 
ment system is adopted, the incidence of their cost is upon the 
taxpayers in so far as the government contributes to the sys- 
tem, for the taxpayers are paying more today than they did 
yesterday for the same service. Immediately following the 
adoption of the system economic forces begin to operate, tend- 
ing to shift the incidence to the employees. The government 
and, through it, the taxpayers, retain some employees who 
would otherwise have left and the whole history of the serv- 
ice is changed. The general conclusion can in fact be laid 
down that the moment prospective retirement benefits become 
an inducement to employees to enter or to remain in the serv- 
ice they become part of the employee's compensation for 
services rendered. 

The future entrants render all their service in a period of 
social evolution in which a system of compulsory savings has 
been applied to them. In legislating for them, it may be as- 
sumed that they have made no other provision against the 
contingencies covered and that any future provision which 
they will make will be supplementary. The present employees 
have rendered the whole, or a part of their active service, in 
a period of social evolution in which to each individual em- 
ployee was left the responsibility of providing against the 
various untoward contingencies of life. Grants to present 
employees in respect to past services are therefore to supple- 
ment such private provision as he may already have made. 
In legislating for them, it should not be assumed that they 
have as a class uniformly failed in meeting their obvious re- 

442 



CONCLUSIONS 



sponsibilities, but that they have made some provision and 
that the benefits granted by the retirement system are supple- 
mental and not the main trenches of their system of economic 
defense. 

Future entrants, as has been seen, will desire benefits in 
respect to all the important contingencies that may arise af- 
fecting their positions. The younger present employees will 
closely resemble them in this respect, whereas the older pres- 
ent employees will attach little or no importance to benefits 
in event of early death or early disability, or of resignation 
or dismissal, but will regard a retirement system as synony- 
mous with a superannuation system, and they will be satisfied 
with a system giving superannuation benefits only, if some 
provision is made for an allowance to the widow in case of 
death soon after entrance upon the pension. 

The cost of a superannuation benefit of a dollar a year first 
payment at age of seventy is of course the same for all em- 
ployees at seventy regardless of whether the retirement system 
was in force when they entered the service or not. The dif- 
ference between the future entrants and the present employees 
lies in this ; the future entrants have all the time between their 
appointment and their ultimate retirement in which to accu- 
mulate the cost of their superannuation benefit, and since that 
period is usually long they receive marked assistance from 
interest in a system operated on the actuarial reserve basis; 
the present employees, on the other hand, have, as a class, 
a far shorter time in which they might accumulate the cost 
and they can receive little assistance from interest. The pres- 
ent employee who is to be retired immediately has, in fact, 
no time to accumulate anything, and unless he already has 
saved several thousand dollars, he could not pay the cost of 
a modest superannuation retirement allowance of a few hun- 
dred dollars a year. The present employees, therefore, can- 
not as a class be called upon to bear the full cost of their re- 
tirement allowances. 

The ability of the present employees to pay even these con- 

443 



Differences 
in the Desire 
for Certain 
Benefits 



Differences 
in the 
Ability 
to Pay for 
the Benefits 



RETIREMENT OF PUBLIC EMPLOYEES 

tributions which they would now be paying had the system 
been in force when they first entered the service is undoubt- 
edly less than the ability of the future entrants to pay exactly 
the same contributions. The future entrant as a rule accepts 
the government position because it is the best he can get. He 
pays contributions to the retirement service as a matter of 
course; in fact, he never notices the payments particularly, 
because they are withheld from his salary. The present em- 
ployee, on the other hand, has been in the habit of receiving 
full salary to do with as he will and his habits of living are 
adjusted on that basis. When contributions to a retirement 
system are required he has to readjust his affairs to meet 
the changed situation. That this change is necessarily for 
his own good is not a conclusive presumption. In many cases 
it involves hardship and sacrifices either in curtailing wise 
expenditures or in abandoning existing investments and in- 
surance. The present employee always has to readjust his 
affairs to meet contributions unless salaries are raised, whereas 
the future entrant has to make no readjustments other than 
those always involved in taking a new position. 
Suscepti- The future entrants will render all their service subject 

Moral ° t° the moral influences of the retirement system, and hence 

Injury }t is of the utmost importance that the system be so devised 

that it will promote rather than check self-development. The 
system must not operate to tie a man to his position when 
that position no longer means anything more to him than 
salary and security. It must leave him free to make the most 
of himself. The future entrant must realize and the public 
must realize that the benefits paid him are part of his com- 
pensation and that he takes them as of right and not as of 
grace. The younger present employees resemble the future 
entrants in these respects, but the older present employees do 
not. They have lived their lives free from the pension influ- 
ence and they come upon their allowances unexpectedly in 
the later years of life. They can accept a gratuity gracefully 
without permitting it to warp them in any way. They have 

444 



CONCLUSIONS 

had their freedom, and having had it, they cannot barter it 
for a doubtful benefit. 

Consideration of these differences between the present em- 
ployees and the future entrants would seem to warrant the 
following reasonably concrete conclusions : 

Present Employees Must Be Specially Provided For. The 
present employees differ so radically from the future entrants 
that it is unwise to attempt to provide a single system ap- 
plicable to both. The future entrants should be provided for 
in a comprehensive adequate manner, whereas a temporary 
transitional system should be devised for the present em- 
ployees, that may contain several make-shift devices. 

Different Classes of Present Employees. In planning the 
system for present employees, since they are not a homo- 
geneous class, it is necessary to distinguish between ( i ) the 
employees who will be retired immediately upon the adoption 
of the system and (2) those who will be retained after its 
adoption. In thinking of this latter group, if not in the actual 
drafting of the retirement legislation applicable to it, it is well 
to differentiate between (a) the service rendered prior to the 
creation of the system and (b) that rendered subsequently. 

Benefits for Past Services — Employees Retired Imme- Must Be 
diately. Benefits in respect to past services paid to the em- ^Expense 
ployees retired immediately upon the creation of the retire- of the 



ment system must be granted at the expense of the taxpayers. 
Except in so far as the employees may be justified in regard- 
ing such payments as liquidated damages for changes made 
in the original conditions of employment, they are gratuities 
granted by the state as the purchase price of a service-improv- 
ing device. They are to supplement the provision that the 
employee has already made under the more highly indi- 
vidualistic regime and they are not assumed to be the em- 
ployee's only provision for old age. In view of these facts, 

445 



Taxpayer 



RETIREMENT OF PUBLIC EMPLOYEES 



Standard 

Benefit 

Should 

Equal 

Minimum of 

Subsistence 



the cost of these benefits must be kept low (i) by granting 
benefits only in event of superannuation, 5 (2) by setting a 
high initial compulsory retirement age, and (3) by placing 
the amount of the benefit at a low figure. 

The standard benefit, it would seem, should be approx- 
imately the minimum of subsistence in the case of the em- 
ployee who entered the service at the usual or ordinary en- 
trance age and served continuously to the compulsory age. 
For the employee who has served a shorter period the benefit 
should be proportionately less, being figured as so much for 
each year of service. A maximum should be fixed above 
which the allowance should not go. 

These conclusions, it will be noted, reject the device of re- 
lating benefits to salaries, either directly or indirectly, al- 
though for future entrants to a complex service indirect rela- 
tionship to salary is regarded as desirable. The reason for 
the difference is that benefits for past services are supple- 
mental gratuities added to what a man may have, and should 
have, saved privately; whereas benefits for future services 
are earned by the employee and become the backbone of his 
system of provision against future contingencies. 

No minimum limit on the amount of the superannuation 
benefit paid to employees retired immediately upon the adop- 
tion of the retirement system is here recommended. It is 
needed only in case an employee has been appointed late in 
life and has served but a few years. A few years' service 
hardly creates a particularly heavy obligation upon the gov- 
ernment, and the fairer procedure would seem to be to as- 
sume that the employee has made other provision and to leave 
the cases in which such is not the fact to the various public 



5 To meet the demands of the employees and to make the system 
more flexible as a transitional device, it might be wise to provide that 
the employee might be permitted on retirement to apply the present 
value of his prospective life annuity either to the purchase of said 
life annuity or to the purchase of a smaller, last survivor annuity for 
himself and one dependent, presumably his wife, or to the purchase of 
an annuity with a certain number of payments guaranteed. 

446 



CONCLUSIONS 

and private agencies administering relief rather than to give 
all employees of short service a comparatively high benefit 
without regard to their need. 



Benefits in Respect to Past Services — Employees Continued 
in Active Service. Benefits in respect to the past services of 
employees who will be continued on the pay roll after the 
adoption of the system should apparently also be paid for 
entirely at the expense of the taxpayers, though it might be 
advisable to give the employees the option entirely at their 
own expense to purchase additions to these benefits granted 
by the government. The cost of these allowances must be 
kept low (i) by allowing benefits only in event of superan- 
nuation or disability (2) by making the conditions for a grant 
rigid and (3) by keeping the amount of benefit low. 

A device that appears to be meritorious is to allow to all 
present employees who entered at or after the ordinary or 
usual entrance age and who will be continued on the active 
rolls, the same annuity as a superannuation allowance per year 
of service rendered, as is granted to the employees retired 
immediately. To the employees who entered at an earlier age, 
a smaller amount would be promised for each year of service 
so calculated that one entering at that age and serving contin- 
uously to the compulsory retirement age would receive the 
maximum benefit for past services. 

The progressively diminishing compulsory superannuation 
age deserves mention in these conclusions. The proposal is 
that at the inception of the system the compulsory retirement 
age shall be placed several years above that regarded as ideal 
for future entrants and that at stated intervals, say, on each 
quinquennial anniversary of the system it should be reduced 
by one year until finally it reaches the age established for 
future entrants. Such a device provides for a more gradual 
transition from the old system to the new, reduces the number 
of cases in which employees are suddenly dropped from active 
salaries to low pensions without much warning and also re- 

447 



Should 
Be Paid 
at the 
Taxpayer's 
Expense 



Progres- 
sively 

Diminishing 
Compulsory 
Age 



RETIREMENT OF PUBLIC EMPLOYEES 

duces somewhat the burdens placed on the taxpayers for ben- 
efits in respect to past services. 



On a 

Savings 
and 

Annuity- 
Basis 



Options 
Regarding 
Employees' 
Contribu- 
tions 



Older 
Employees 
May Waive 
Benefits 
Other Than 
for Super- 
annuation 



Benefits for Future Services of Present Employees. Full 
acceptance of the theory that benefits in respect to future serv- 
ices become part of the compensation and that equal services 
should receive equal rewards would lead to the adoption of a 
savings and annuity system for the future services of present 
employees and the government would pay to the present em- 
ployee's account the same amount or the same proportion of 
salary which it would pay in respect to a future entrant. If 
the annual contributions for future entrants are varied ac- 
cording to age and sex, and the government pays half and the 
employee half, the appropriate procedure in the case of pres- 
ent employees would apparently be for the government to pay 
the costs of such benefits as it chooses to grant in respect to 
the past services of present employees and in respect to their 
future services to pay that amount which it would now be 
paying in their behalf had the system been in force when they 
first entered the service. 

The question of exacting contributions from present em- 
ployees even for future services without any readjustment 
of salaries is one demanding full consideration. Since benefits 
for future services are part of compensation, the government 
should make whatever contributions it is to make uncondi- 
tionally, but it would seem that it might well grant the em- 
ployees some option regarding their own contributions, in 
order to allow for the fact that present employees may already 
have investments that would be sacrificed if heavy contribu- 
tions were enforced. 

The rights of the present employees to benefits on death, 
resignation and dismissal in respect to future services should 
probably be respected, though it might be advantageous to 
permit the older present employees to waive these rights to 
secure a larger superannuation benefit. A waiver in the case 
of the younger present employees would, however, be unde- 

448 



CONCLUSIONS 

sirable, because it would limit their freedom of contract, and 
it would likewise impede their dismissal if they became un- 
satisfactory. 

The Actuarial Deficit on Creating a System. When a re- important 
tirement system is created to pay benefits to present employees pro^em 
in respect to past services it obviously starts with a large 
deficit, because neither the government nor the employees have 
been paying the premiums that would have been necessary to 
accumulate an actuarial reserve sufficient to meet the pros- 
pective retirement claims. In the case of the aged present em- 
ployee, the entire cost of his prospective superannuation allow- 
ance is a deficit, whereas in the case of the young employee 
who has served but a little while, the deficit is only a small 
amount. The total of all individual deficits is, however, a very 
large amount in proportion to the pay roll, and meeting it is 
one of the important financial problems involved in establish- 
ing a system. 

If no special provision is made to meet it, that is, if benefits Two 
in respect to past services are paid as they come due from the courses 
current revenues of the state, the burden on the taxpayer for 
these benefits will rapidly increase for a number of years, and 
then it will diminish until ultimately it vanishes when the last 
of the present employees has died. To follow this course 
seems undesirable, because it is likely to make the system un- 
popular and because it frequently leads to grants of large 
benefits without sufficient attention being given to their real 
cost. Two possible courses may be mentioned as deserving 
attention : ( I ) Paying off the deficit on the installment plan 
and (2) the creation of a perpetuity. Under the first scheme 
arrangements are made whereby each year the taxpayers pay 
either (a) a fixed amount which is used first to pay the in- 
terest on the debt and then to curtail the principal or (b) a 
fixed amount to curtail the principal and the interest due on 
the balance remaining unpaid. The payments should be so 
figured that the deficit will be wiped out in about sixty years. 

449 



RETIREMENT OF PUBLIC EMPLOYEES 

Under the perpetuity plan, the deficit is never wiped out: the 
government issues bonds for the amount which are turned 
over to the superannuation fund. When the principal of these 
bonds is required for pension claims of present employees, 
the bonds are purchased by the retirement fund with the accu- 
mulations arising from the contributions made by or in behalf 
of the future entrants. The taxpayers under this system al- 
ways have to pay the interest, but they are never called upon 
to pay the principal unless the retirement system is wound up. 
The method of installment payment appears to be the proper 
one to follow in financing the retirement benefits for past 
services. 

In ending these conclusions, it is perhaps well to repeat the 
thought given at the beginning. They are not immutable, they 
are rather prima facie. The important points are to adopt 
a system that will be financially sound, that will meet the 
needs of the service to which it is applied, that will be just 
to the employees as a class and to individual employees, and 
that will receive the approval of a public enlightened as to the 
possibilities of a retirement system as a social insurance de- 
vice, the benefits of which are earned by the employees. 



APPENDIX 
LIST OF REFERENCES 

The list of references given below is not presented by any 
means as an exhaustive bibliography. It contains the more 
important records, reports and writings examined in the 
preparation of the present book. 

First are given the reports and documents of governmental 
agencies and quasi-public organizations, and then the more 
general discussions not in documents and reports. References 
to workmen's compensation material are not included. A few 
references are given to works on social insurance in general. 
They are included because in several instances it has seemed 
advisable to quote from them. Many important works on so- 
cial insurance are not mentioned, however, and hence the list 
should not be regarded at all as a bibliography on old age 
pensions in general. 

Reports and Documents 
(Important Documents Are Marked with Asterisks.): 

The United States 

The Federal Government: 

Reports of the Committee on Departmental Methods: 

Washington, 1906. 
Departmental Methods Committee, Sub-committee on 
Personnel, "Superannuation of government em- 
ployees" in Government Accountant, Washington, 
1907, Vol. I. 
Statistics of Employees: Executive Civil Service of the 

45i 



RETIREMENT OF PUBLIC EMPLOYEES 

United States by Lewis Meriam, U. S. Census Bul- 
letin 94, Washington, 1908. 
Teachers' Pension Laws in the United States and Europe. 
Senate Document 823, 61st Congress, 3d Session. 

* Civil Service Retirement, Great Britain and New Zealand 

by Herbert D. Brown, Senate Document 290, 61st 
Congress, 2nd Session. Reprinted as Appendix B, 
House Document 732, 62d Congress, 2nd Session. 

Civil Service Retirement, New South Wales, Australia, 
by Herbert D. Brown. Senate Doc. 420, 61 st Con- 
gress, 2nd Sess. Reprinted as Appendix C of House 
Document 732, 62d Cong., 2d Session. 

Retirement of employees of the Classified Civil Service, 
U. S. Cong. House Committee on Reform in Civil 
Service, Report of Committee, 19 10. 

* Savings and Annuity Plan Proposed for Retirement of 

Superannuated Civil Service Employees, by Herbert 
D. Brown, Senate Document No. 745, 61st Congress, 
3d Session. Reprinted as Appendix A, House Docu- 
ment 732, 62d Congress, 2d Session. 
Reclassification and Retirement of employees in the 
Classified Civil Service. Preliminary hearing before 
House Committee on Reform in the Civil Service in 
House of Representatives Bills 729, 750, 1298, 9242 
and 11661, May 27 and June 1, 191 1. 

* Retirement of Employees in the Classified Civil Service, 

No. 4, Hearings before the Committee on Reform in 
the Civil Service, Jan. 17-18, 1912. 
** Retirement from the Classified Civil Service of Superan- 
nuated Employees. Message from the President of 
the United States transmitting report of the Commis- 
sion on Economy and Efficiency on the subject of Re- 
tirement from the Classified Civil Service of Superan- 
nuated Employees. Contains as reprints Mr. Herbert 
D. Brown's Civil Service Retirement, Great Britain 
and New Zealand, his Civil Service Retirement, New 
452 



APPENDIX 

South Wales, Australia, and his Savings and Annuity- 
Plan for Retirement of Superannuated Civil Service 
Employees. House Document 732, 626. Congress, 2d 
Session. 

* Teachers' Pension Systems in Great Britain by Raymond 
W. Sies. U. S. Bureau of Education, Series No. 34, 
Whole No. 544, 1913. 

** Contributory Plan of Retirement of Employees in the 
Classified Service. Hearings before the House Com- 
mittee on Reform in the Civil Service, 63d Con- 
gress, 2d Session. Feb. 20 and March 6, 19 14. 
(Contains address by Miles M. Dawson before the 
American Civic League, Washington, D. C. Dec. 28, 
1911.) 
Indefinite Leaves of Absence to Superannuated Em- 
ployees of the Postal Service. Hearings on House of 
Representatives Bill 6915, House Committee on Post 
Offices and Post Roads, April 7-8, 1916. 

Retirement of Postal Employees, Hearings on House of 
Representatives Bill 10130, House Committee on Post 
Offices and Post Roads, April 12, 1916. 

* Retirement of Employees in Classified Service. Hear- 

ing before the Committee on Reform in the Civil Serv- 
ice. House of Representatives, 64th Congress, 1st 
Sess., April 28, 1916. 
The Annual Reports of the U.. S. Civil Service Commis- 
sion. 

The Commonwealth of Massachusetts: 

* Old Age Pensions, Annuities and Insurance. House 

Document No. 1400, Boston, January, 19 10. 
Massachusetts Board of Education. Special Report 011 
Teachers' Retirement Allowances. House Document 
No. 1920, Boston, 1913. 
** Report of the Massachusetts Commission on Pensions. 
House Document 2450, Boston, 1914. 
453 



RETIREMENT OF PUBLIC EMPLOYEES 

The Retirement System for Employees of the Common- 
wealth. Circular Explanatory of the Provisions of 
Chapter 532, Act of the year 191 1 and acts in 
amendment thereof and in addition thereto, Bos- 
ton, 1 914. 

The City of New York: 

* The Condition of the Public School Teachers' Retire- 

ment Fund of New York City, by Wm. A. Hutchinson, 
Actuary of the Mutual Life Insurance Company, in 
the 6th Annual Report of the Secretary of the Board 
of Retirement, New York, 19 13. 

* Report on the Police Pension Fund of the City of New 

York. Interpretative section by Mr. Robert von 
Reutlinger. Actuarial section by Mr. George B. Buck. 
The (New York) Bureau of Municipal Research, 

I9I3- 

* Report on Teachers' Retirement Fund. The Mayor's 

Commission on Pensions. Interpretative section by 
Mr. Robert von Reutlinger. Actuarial section by Mr. 
George B. Buck, New York, 1915. 
Report on the Cost of Living for an Unskilled Laborer's 
Family in New York City. Submitted by the Bureau 
of Standards to the Committee on Salaries and Grades 
of the Board of Estimates and Apportionment, New 
York, 1914. (Contains bibliography). 
** Report on the Pension Funds of the City of New York. 
The Mayor's Commission on Pensions. 

Part I — Operation of the Nine Existing Pension 
Funds, by Mr. Robert von Reutlinger, New York, 
1916. 
Part II — An Actuarial Investigation of the Mortal- 
ity and Service Experience of the Special and 
General Service Funds for Municipal Employees 
by Mr. George B. Buck, New York, 19 16. 
(A third part is in preparation.) 
454 



APPENDIX 

The Government of the Philippine Islands: 

Pension and Retirement Fund for the Philippine Con- 
stabulary. Report of a Committee appointed May 12, 
1912, to study the question of a pension and retirement 
fund for the Philippine Constabulary and to prepare 
a bill for presentation to the Philippine legislature. 
Manila Bureau of Printing, 1912. 

The Carnegie Foundation for the Advancement of Teaching: 
* Annual reports from 1906 to date, especially the more 
recent ones. New York. 
** Bulletin 9, "A Comprehensive Plan of Savings and An- 
nuities for College Teachers" by Henry S. Pritchett, 
New York, 1916. 

The National Civil Service Reform League: 

Superannuation in the Civil Service. New York, 1901. 
Superannuation in the Civil Service. New York, 1906. 
Superannuation in the Civil Service. New York, 1907. 
Civil Pensions for Federal Employees. New York, 
1909. 

The New York Civil Service Reform League: 
Retirement Legislation. 

The National Civic Federation: 

The Problem of Pensions, Federal, State, Municipal and 
Industrial, New York, 19 16. Contains address by 
William R. Willcox, Chairman of the Pension Depart- 
ment; Pensions for State Employees by Mr. F. Spen- 
cer Baldwin; Pensions for Municipal Employees by 
Leonard Blakey; and Industrial Pension or Retire- 
ment Systems. 

Great Britain and Ireland 

The National Civil Service {References are to the British 
Parliamentary Papers) : 

455 



RETIREMENT OF PUBLIC EMPLOYEES 

Report from the Select Committee Appointed to exam- 
ine and consider what regulations and checks have 
been established to control the several branches of the 
public expenditure in Great Britain and Ireland, 1807, 
Vol. II, 1808, Vol. Ill, 1809, Vol. III. 

Third Report from the Select Committee on the Public 
Income and Expenditures of the L'nited Kingdom; 
Superannuations; Military and Xaval Half Pay; 
Widows' Pensions, Pensions to soldiers and sailors 
for length of service, Civil Superannuation Allow- 
ances and pensions to foreign ministers, 1828, Vol. V. 

Memorial from the civil servants of the Crown, pre- 
sented to the Treasury in 1848 for the conversion of 
abatements from salaries into a provident fund, etc., 
1852-53, Vol. LVII. 

Letter to the late Chancellor of the Exchequer dated 7th 
Dec, 1853, from the members of a general committee 
of civil servants of the Crown, relating to the estab- 
lishment of a civil sendee provident fund, etc., 1854- 
55, Vol. XXX. 

Report from the Select Committee on Civil Service Su- 
perannuation, 1856, Vol. IX. 

Report from the Commissioners appointed to inquire into 
the Operation of the Superannuation Act, 1857, Vol. 
XXIV. 

Supplemental Report of Commissioners appointed to in- 
quire into the operation of the Superannuation Act, 
1857-58, Vol. XXV. (Contains the report of the actu- 
aries, Ansell and Morgan.) 

Correspondence between the Science and Art Depart- 
ment and the Treasury relative to Superannuation and 
Sick Allowances, 1887, Vol. LXV, and 1888, Vol. 
LXXVIII. 

First Report of the Royal Commission appointed to in- 
quire into the Civil Establishments of the different 
offices of State at Home and Abroad, 1887, Vol. XIX. 
456 



APPENDIX 

Second Report of the Royal Commission appointed to 
inquire into the Civil Establishment of the different 
offices of State at Home and Abroad, Vol. XXVII. 

Report from the Select Committee on Workmen (Wool- 
wich Arsenal) (As to their right to pensions), 1889, 
Vol. XVI. For preliminary correspondence see 1887, 
Vol. LI. (Of interest in considering pensions as 
wages and the necessity for clear statement of retire- 
ment privileges to all new entrants.) 

Fourth Report of the Royal Commission appointed to 
inquire into the Civil Establishment of the different 
offices at home and abroad, 1890, Vol. XXVII. 

Report from the Select Committee on the Superannua- 
tion Acts Amendment (No. 2). Bill with the pro- 
ceedings and evidence, 1892, Vol. XVII. 

Memorial of Civil Servants to the Treasury, 1899, Vol. 
LXXVIII. 
** Report of the Royal Commission on Superannuation in 
the Civil Service, 1903, Vol. XXXIII. 

Report of an Inter-Departmental Committee on Em- 
ployment under the Crown, as affected by Part I 
of the National Insurance Act, 191 1. 1912-13, Vol. 
XLII. 

Teachers {References Are to the British Parliamentary Pa- 
pers) : 
School Teachers. Report of Committee whether by de- 
ductions from the Parliamentary grant in aid of Ele- 
mentary Schools or any other means. Annuities may 
be granted to certified Teachers on their retirement by 
reason of age and infirmity, 1872, Vol. IX. 

* Report of Committee on the School Board, London Su- 

perannuation Bill, 1890-91, Vol. XVII. 

* Report of Committee on Teachers' Superannuation, 

1892, Vol. XII. 

* Report of Departmental Committee on the question of 

457 



RETIREMENT OF PUBLIC EMPLOYEES 

the Superannuation of Teachers in Public Elementary 
Schools, 1895, Vol. LXXVI. 
Reports on the Valuation of the Teachers' Pension Fund 
(Ireland) on 31 Dec. 1900, in 1903, Vol. LIII; on Dec. 
1905 in 1907, Vol. LXIV. 
* First Septennial Actuarial Report on the Assets and Lia- 
bilities of the Elementary School Teachers' Deferred 
Annuity Fund, 1908, Vol. LXXXIII. 

* Second Septennial Actuarial Report on the Assets and 

Liabilities of the Elementary School Teachers' De- 
ferred Annuity Fund. H. C. paper, No. 42, for 19 16. 

* Second Report of the Advisory Committee on the Dis- 

tribution of Exchequer Grants to the Universities 
and the University Colleges in England, 191 2, Vol. 
XXVII. 

* Third Report of the Advisory Committee on the Distri- 

bution of Exchequer grants to Universities and Uni- 
versity Colleges in England, 191 3, Vol. XXVI. 
Reports of the Departmental Committee on the Super- 
annuation of Teachers, 19 14, Vol. XXV. 

Police {References Are to the British Parliamentary Papers) : 

* Report from the Select Committee on Police Superan- 

nuation Funds, 1875, Vol. XIII. (Of especial value as 
showing the disadvantages of discretionary pensions.) 

Report from the Select Committee on Police Superan- 
nuation Funds, 1877, Vol. XV. 

Report from the Select Committee on the City of London 
police (pension ) "bill, 1889, Vol. IX. 

Report of Departmental Committee on Metropolitan Po- 
lice Superannuation, 1890, Vol. LIX. 

Report from the Select Committee on Police (Scotland) 
(Pension, etc., Bill), 1890, Vol. XVII. 

Special Report and Report from Select Committee on the 
Police Superannuation (Scotland) Bill, 1901, Vol. 
VII. 

458 



APPENDIX 

Miscellaneous (in British Parliamentary Papers): 

Report of Committee on the Union Officers Superannua- 
tion (Ireland) Bill, 1882, Vol. XIII. 
** Report of the Board of Trade on Railway Superannua- 
tion Funds, 1910, Vol. 57, and 191 1, Vol. 29. (This 
report is one of the most valuable documents in exist- 
ence regarding retirement funds.) 
Report of the Select Committee on the Asylum Officers 
Superannuation Bill, 1909, Vol. VI. 

Not in British Parliamentary Papers 

Actuaries' Report to the London School Board by Archi- 
bald Hewatt, F. I. A. FFA., 1897. 

Superannuation and Provident Fund, London County 
Council, January, 19 13. 

British Colonies: 
** Establishment of a Superannuation Fund for the whole 
of the Government Service: Report of the Committee 
and of the Actuarial Sub-Committee, Sydney, New 
South Wales, 1912. 
Report on the Organization of the Public Service of Can- 
ada by Sir George Murray, 3 Geog. V. A. 191 3 Ses- 
sional Papers 57A, Ottawa, 1912. 

Writings Other Than Reports and Documents 

Allen, S. J. H. W. Social conditions as affecting 
widows' and orphans' pension funds in Journal of the 
Institute of Actuaries, Vol. 39: 337-369, London, 1905. 

Baldwin, F. Spencer. Retirement Systems for Munici- 
pal Employees in American Academy of Political and 
Science Annals, Philadelphia, 191 1. 

Brandeis, Louis D. Our new peonage : discretionary 
pensions, in his Business a Profession, Boston, 191 4, 
pp. 65-81. 

459 



RETIREMENT OF PUBLIC EMPLOYEES 

Buck, George B. Valuation of Pension Funds in Pro- 
ceedings of the Casualty Actuarial and Statistical So- 
ciety of America, Vol. II, Part III, No. 6, May 26, 27, 
I 9 J 6, p. 37o. 

Burn, Joseph and, Symmons, Frank Percy. Practical 
Points in Connection with the Formation and Valua- 
tion of Pension Funds in The Journal of the Institute 
of Actuaries, Vol. 49, 191 5. 

Collie, Sir John, M.D., Malingering and Feigned Sick- 
ness. Edward Arnold, London, 19 13. 

Dawson, Miles M. Address before the American Civil 
League, Washington, D. C. Dec. 28, 191 1, printed 
in "Contributory Plan of Retirement of Employees in 
the Classified Civil Service." Hearings before the 
House Committee on Reform in the Civil Service, 63d 
Congress, 2nd Session, Washington, 19 14. 

Dawson, Miles M. Governmental methods of providing 
Old Age Pensions in International Actuarial Congress 
VII, Amsterdam, 1912. Reports, Memoirs and Pro- 
ceedings, Amsterdam, 1912, Vol. I, pp. 207-236. 

Dawson, Miles M. Old Age Pensions vs. Old Age An- 
nuities in Bulletin des Assurances Sociales — Paris, 
1912, Tome 23, pp. 33-61, Congress International des 
Assurances Sociales. 

d'Roode, Albert. Pensions as Wages, in The American 
Economic Review, Vol. Ill, p. 288. 

Eliot, Charles W. Teachers' Tenure of Office, Address 
before Massachusetts Teachers' Association, Dec. 30, 
1879, in nis "Educational Reform," Century Co., New 
York, 1898. 

Falkner, Roland P. Retirement funds for government 
employees. Proposed superannuation methods, before 
National Civic Federation Meeting 9, 1908, in pro- 
ceedings New York, 1909, pp. 187-196. 

Farr, William. Statistics of the Civil Service, in Journal 
of the Statistical Society of London, 18th Dec. 1848. 
460 



APPENDIX 

Goodnow, Frank J. Constitutionality of Old Age Pen- 
sions, in American Political Science Review, Vol. 5, 
May, 191 1. 
Groomes, John, of the War Department. Observations 
on the superannuation fund proposed to be established 
in the several public departments by the Treasury 
minutes of 10 August 1821. London, C. Richards, 
1822. 
Henderson, Charles Richmond. "Industrial Insurance, 
Municipal Pension Systems and Pensions for Teach- 
ers," in the American Journal of Sociology, May, 1908, 
Vol. 13, p. 841. 
Hewat, Archibald. Widows' and Pension Funds, Edin- 
burgh, T. and A. Constable, 19 12. 
Hoffman, Frederick L. American Public Pension Sys- 
tems and Civil Service Retirement Plans in Interna- 
tional Actuarial Congress VII, Amsterdam, 1912. Re- 
ports, Memoirs and Proceedings, Amsterdam, 1912, 
Vol. I, pp. 237-282. 
Hoffman, Frederick L. The problem of poverty and 
pensions in old age in Proceedings National Confer- 
ence of Charities and Corrections, Fort Wayne, 1908, 
Session 35, pp. 219-234. 
Hoffman, Frederick L. Poverty and Pensions in Old 
Age in American Journal of Sociology, September, 
1908. 
Lefebvre, L. Charles. Les pensions de retraites dans les 
administration publiques en France. Le regieme de 
retraites des chemins de fer del etat, in International 
Actuarial Congress VII, Amsterdam, 191 2. Reports, 
Memoirs and Proceedings, Amsterdam, 1912, Vol. I, 
pp. 301-307. 
McLaughlan, James J. Fundamental Principles of Pen- 
sion Funds, the Inaugural address session, 1908-9, 
Transactions of the Faculty of Actuaries. 
Manly, Henry W. Staff Pension Funds in The Journal 

461 



RETIREMENT OF PUBLIC EMPLOYEES 

of the Institute of Actuaries, V. 36, October, 1901. 

Manly, Henry W. Staff Pensions in the Journal of the 
Institute of Actuaries, V. 45, April, 191 1. 

Manly, Henry W., and Ackland, Thomas G. "On the 
Superannuation and Pension Funds of certain Metro- 
politan Borough Councils, Their Establishment, Ad- 
ministration and Actuarial Investigations" in the Jour- 
nal of the Institute of Actuaries, Vol. 46, 1912, p. 327. 

Marr, Vyvyan. Widows' funds : The valuation of a 
widow's annuity, in Transactions of the Faculty of 
Actuaries, Vol. 2, pp. 307. 

Mason, Edward F. Municipal Pensions in National Mu- 
nicipal Review, Baltimore, 19 13, Vol. 2, p. 260-264. 

Peters, Michael. The Mischief of Pensions in The Gen- 
tleman's Magazine, Vol. 303, pp. 113-119, London, 
1907. 

Phelps, Edward Bunnell. A summary of the possibili- 
ties and probable cost of the proposed plan for work- 
men's compensation and old age pensions for Amer- 
ican Brewery Workmen. Compiled by E. B. Phelps 
for the U. S. Brewers' Association, New York, 191 1. 

Phelps, Edward Bunnell. American Brewery Workers' 
surprising rejection of their proffered workmen's com- 
pensation and old age pensions — a clear-cut case of the 
consciousness of kind. American Underwriters' Mag- 
azine and Insurance Review, New York, 1912. Vol. 
37, pp. 1 13-124. 

Pritchett, Henry S. The Moral Influence of a Univer- 
sity Pension System in Popular Science Monthly, New 
York, 191 1, Vol. 79, pp. 502-513. 

Pritchett, Henry S. A Pension System for Public 
Schools, in the Independent, New York (1913), Vol. 
74, p. 617. 

Prosser, Charles A. Teachers' Annuities and Retire- 
ment Allowances, in Journal of Education, Dec. 28, 
191 1, Vol. 74, p. 683. 

462 



APPENDIX 

Prosser, Charles A., and Hamilton, W. I. The Teacher 
and Old Age, Boston, Houghton Mifflin Co., 191 3. 

Roth, Louis. Pension funds for public service employees 
in the Survey, New York, 191 5, Vol. 35, pp. 109- no. 

Rubinow, Isac Max. The Pension Plan for the Brewing 
Industry in the Survey, New York, 19 12, Vol. 29, pp. 
360-363. 

Rubinow, Isac Max. Social Insurance, New York, 
Henry Holt & Co. (1913). 

Seager, Henry R. Social Insurance, New York. Mac- 
millan Co., 1910. 

Studensky, Paul. The Pension Problem and the Philoso- 
phy of Contributions. The Pension Publishing Co., 
Woolworth Bldg., N. Y., 1917. (Chapters I-IV ap- 
peared in the "American Teacher" Oct., Nov., Dec, 
1916; Feb., March., 1917.) 

Thwing, Charles F. A Pension Fund for College Pro- 
fessors in North American Review, Vol. 181, pp. 722- 
733, New York, 1905. 

Vanderlip, Frank A. Insurance for Workingmen in 
North American Review, Dec, 1909. 



INDEX 

PAGE 

ACKLAND, T. G., 

Quotations from testimony regarding average salary plan, 143 

Reference to writings of, 361 

Actuarial Deficit on Creation of System, 

Origin of, 35 6 -357 

Effect of ignoring, 357-358 

Methods of financing, 358-362 

Actuarial Reserve Plan vs. Assessment or Cash Disburse- 
ment Plan, 325"337 
Difference between the two, 325-328 
Merits and defects of assessment or cash disbursement 

plan, 3 2 8-334 

Merits and defects of actuarial reserve plan, 334-337 

Conclusions, 434-436 

Actuarial Reserve System, Creation, Operation and 

Management of, 338-355 

Conclusions, 436-437 

Actuary, Necessity for 34-36, 340 

Position of, in planning system, 341-343 

Work of, in developing system, 343-353 

Work in operating existing system, 353-356 

Conclusions in respect to, 436-437 

Age at entrance in relation to cost of benefits, 

Superannuation, 164 

Disability, 205 

Age conditions for retirement, 

Analysis of problem, 42 

General discussion, 104-120 

In the English Civil Service, no, in 

Conclusions regarding, 394-399 

Allen, S. J. H. W., 

Reference to writings of, 251, 459 

Amount of Benefit, 

Analysis of problem, 44-52, 54 

Superannuation, 120-162 

Disability, 190-201 

465 



INDEX 

PAGE 

Withdrawal, 216, 231-232 

Death in active service not in performance of duty, 243-255 

Death in active service in performance of duty, 264-271 
Present employees, 304-308, 311-315, 317 

Conclusions, 402-426 

Appropriations, 

Form of, 37 I "373 

Assessment Plan vs. Actuarial Reserve Plan, 

Analysis of problem, 60-62 

General discussion, 325-337 

Difference between the two, 325-328 
Merits and defects of assessment or cash disbursement 

plan, 3 2 8-334 

Merits and defects of actuarial reserve plan, 334-337 

Conclusions, 434-436 

Attachment, 

Benefits to be free from, 374-376 

Average Salary Plan, 139 

Baldwin, F. Spencer, 

Quotations from writings of, 33, 34 

Reference to writings of, 459 

Beneficial Societies in the Public Service, 238 

Benefits, 

Contingencies possibly covered by, enumerated, 39, 40 

Conclusions regarding, 389, 390 

See also Superannuation, Disability, Withdrawal and 
Death. 

Bibliography, 453-4^3 

Blaschke, Dr. Ernest, 

Summary from writings of, 33 1 * 33 2 

Borrowing from Fund, 378-380 

Brandeis, Louis D., 

Quotation from, 25, 228 

Reference to writings of, 459 

Brown, Herbert D., 

References to writing of, 4, 27, 68, 210, 213, 236 

Reference to plans and work of, 79> 80, 339 

Buck, George B., 

Acknowledgement of indebtedness to, xiu 

466 



INDEX 

PAGE 

Reference to writings of, 

165, 169, 179, 203, 205, 208, 251, 253, 303, 364, 459 
Reference to work of, 339 

Burn, Joseph, 

Reference to writings of, 460 



Carnegie Foundation for Advancement of Teaching, 

Quotation from reports of, 70, 74, 120, 157, 170, 298, 299, 300 
Reference to report of, 95, 369 

Cash Disbursement Plan. See Assessment Plan. 

Chamberlain, Hon. Joseph, 

Statement regarding nature of retirement benefits, TJ 

Cleveland, Frederick A., 

Acknowledgement of indebtedness to, xiii 

Collie, Sir John, 

Reference to writings of, 188, 460 

Commutation of Benefits, 

Objection to, 375-378 

Compensation, 

Benefits, part of, 21-23, 71-76, 387, 388 

Compulsory Membership, 26-28 

Compulsory Retirement, 108-112 

Conclusions regarding necessity for, 394-396 

Conclusions, 381-450 

Conditions Upon Which Benefits Shall Be Granted, 

Analysis of problem, 4 I- 44 

Conditions for superannuation or service benefit, 104-120 

Disability, 180-190 

Present employees, 303, 310, 316, 321 

Conclusions, 393"402 

Contingencies Involved in Establishing Retirement Sys- 
tem, 
Enumerations of, 39> 4° 

Conclusions regarding covering, 3^9-393 

Contributions, Arguments for and Against, 

Nature of problem, 57"6o, 67-79 

General discussion, 79-9 1 

In case of disability in performance of duty, 211 

467 



INDEX 



PAGE 



In case of death not in performance of duty, 256 

In case of death in actual performance of duty, 271, 272 
Present employees, 296-299, 303, 310, 319 

Conclusions, 429, 432 

Contributions, 

Factors determining amount of. See Cost of Benefits. 

Contributions, 

Indirect, 99-102 

Contributions, return of. See Withdrawal and Death. 

Cost of Benefits, 

Analysis of Problem, 52-57 

Superannuation Benefit, 162-170 

Disability Benefit, 201-206 

Death Benefit, 235-256 

Present Employees, 302, 308, 316, 319 

Conclusions, 426-428 

Cost of Superannuation, 5-9 

Cost as Affecting Choice of Retirement Age, 118 

Costs, Division of, Between Government and Employees, 

Analysis of problem, 51-61 

General discussion, 92-102 

In case of disability benefit, 206-208 

In case of disability in actual performance of duty, 211 

In case of special death benefits, 256, 257 

In case of death in actual performance of duty, 271 

Present employees, 303, 309, 319 

Conclusions, 429-434 



Dawson, Miles M., 113 

Reference to writings of, 27, 68, 460 

Quotation from writings of, 79 

Death After Retirement, 

Benefit in event of, 273-279 

Nature of problem, 273 

Death after superannuation retirement, 274-277 

Death after disability retirement from ordinary causes, 277, 278 
Death after disability retirement, both disability and death 

due to actual performance of duty, 278, 279 

Death in Active Service, Death Direct Result of Actual 

Performance of Duty, 261-272 

Interests of parties in benefit, 261-264 

Conditions upon which granted, 264 

468 



INDEX 

PAGE 

Amount of benefit in relation to salary, 264-269 

Amount of benefit in relation to economic need, 269-271 

Benefit non-contributory, 271 

Death in Active Service, not caused by actual perform- 
ance OF DUTY, 233-260 

Objects sought in establishing benefit, 233-235 

Objections to benefit, 235-243 

Amount of benefit, 243-255 

The cost of insurance benefit, 255 

Contributory vs. Non-contributory for special death 

benefit, 256, 257 

Adjustment to other benefits, 257-259 

Summary, 259, 260 

Dependents, in Relation to Superannuation Benefit, 159-161 

Sex of employee, 168 

Benefit on withdrawal, 219-220, 224, 225 

Death benefit, 236-240, 247, 251-255, 265-271, 274 

Present employees, 295 

Conclusions, " 39 2 , 422, 4 2 3 

De Roode, Albert, 

Quotations from writings of, 75> 7& 

Disability Benefit, 171-215 

Definition, 17 1 

Objects sought in establishing, 13, 14, l 7 2 

Danger of fraud in, 174-180 

Conditions upon which granted, 180-190 

Amount in relation to salary, 190-197 

Amount in relation to length of service, 197-199 

Amount in relation to social and economic need, 199-201 

Cost of, 201-206 

Contributory vs. Non-contributory, 206-208 

In actual performance of duty, 208-215 

Conclusions, 400-402 

Discretionary Benefits, Objections to, 

Superannuation benefits, 105-108, 123-125 

Disability benefits, I9 1 , J 9 2 

Death benefit, 247, 265 

Conclusions, 393> 402 

Dismissal. See also Withdrawal. 

Dismissal Without Benefits as Solution of Superannua- 
tion Problem, 

Objections to, 10 

Efficiency Ratings, use of, ii 

469 



INDEX 

PAGE 

Eliot, Charles W., 

Bibliography, 460 

English Civil Service, 

Origin of competition examinations in, 13 

Voluntary life insurance in, 27 

Introduction of death benefit in, 68 
Experience of, indicating incidence of cost of retirement 

systems, 72, 73, 74 

History of contributions in, 81-84 

Falkner, Roland P., 

Reference to writings of, 299, 460 

Farr, William, 27, 155 

Reference to writings of, 27, 155, 460 

Females. See Sex. 

Flat Pension, limited applicability of, 125 

Forfeitures, 216-232 

Conclusions against, in event of dismissal, 391, 392 

Fraser, Duncan, 134 

Fraud, Danger of, in disability benefits, 174-177 

Future Entrants vs. Present Employees, 17-20, 290-300, 386, 387 



Goodnow, Dr. Frank J., 

Reference to article by, 16, 460 

Graft, Pension, Danger of, 34 

Graham, Sir J. R. G., 

Testimony regarding introduction of contributions in 

English systems, 83 

Groomes, John, 

Quotation from, 164 

Bibliography, 461 

Guarantees, of Solvency, 100, 433 

Of interest rate, 101 



Hamilton, W. I. See Prosser, C. A. 

Hardy, George F., 

Extract from testimony of, 327 

470 



INDEX 

PAGE 

Health Insurance, 

General in relation to retirement system in England, 181 

Henderson, Charles Richmond, 

Bibliography, 461 

Hewat, Archibald, 

Reference to writings of, 166, 230, 461 

Hoffman, Frederick L., 

Acknowledgement of indebtedness to, xiii 

Reference to writings of, 31, 461 

Quotation from writings of, 160 

Huggett, James, 

Reference to testimony regarding widows' and orphans' 

funds, 240 

Quotation from, 242 

Hutcheson, William A., 

Reference to work of, 339 

Incidence of Cost of Retirement Benefits, 

21-23, 71-76, 291-294, 387, 388 

Indirect Contributions, 99-102, 432-434 

Inefficient Employee, treatment of, under retirement 

system, 280-282 

King, George H., 

Quotation from writings of, 70, 71, 350 

Lefebvre, L. Charles, 

Bibliography, 461 

Lidstone, G. J., 

Comments regarding necessity for figures for each ex- 
perience, 350 

Life Insurance, optional system of, in English service, 27 

General discussion of death benefits as part of retirement 

system, 233-280 

Conclusions, 3&9> 42 x -426 

Lindsay, Samuel McCune, 

Acknowledgement of indebtedness to, xiii 

Loans to Members, 37&-380 

McLaughlan, James J., 

Reference to writings of, 68, 245, 377, 461 

471 



INDEX 

PAGE 

Management, Expenses of, under contributory system, 

discussed, 89-91 

Expenses of, to be borne by government, 99 

Method under actuarial reserve system, 338-355 

Conclusions regarding, 434-439 

Manly, H. W., 

Quotations from writings of, 35, 68, 69, 70, 137, 351 

Reference to writings of, 361, 461 

Maximum and Minimum Limitations on Benefits, 123-124 

Medical Examinations, 

In connection with disability benefits, 175-178 

Model System, 

Xone universally applicable, 385 

Murray, Sir George, 

Reference to report of, 4 

National Civil Service Reform League, 

Reference to reports of, 17 

Quotation from reports of, 9, 10, yy, 221, 222 

New South Wales, 

Reference to report on proposed system for, 25, 250 

New York Civil Service Reform Association, 

Reference to report of, 28 

Quotation from report of, 271, 272 

Objections to Retirement System, 26-34 

Objects Sought in Establishing System, 1-25 

By the government, 3-17 

By the employee, I7" 2 5 

By the public, 25 

Occupation, 

In relation to cost of benefits, superannuation, 169 

Disability, 206 

Optional Systems, inadequacy of, 26 

Options in Settlement, etc., 274-277, 374-380, 423 

Orphans' and Widows' Fund, 240-243, 247, 422 

"Paper Fund" Method of Operating Systems, 329 

472 



INDEX 

PAGE 

Pension, 

Objection to use of term, xi-xii 

Pension Graft, 

Danger of, 34 

Peters, Michael, 

Reference to writings of, 226, 235, 237, 238, 462 

Phelps, Edward Bunnell, 

Bibliography, 462 

Present Employees, 289-324 

Difference between, and future entrants, 290-300 

In homogeneity, 290-291 

In economic relation to retirement system, 291-294 

In period of social evolution, 295 

In desires for benefits, 295 

In ability to provide benefits, 296-299 

In susceptibility to moral injury, 299-300 

Division of present employees, 300 
Present employees to be retired upon adoption of system, 301-308 

Contingencies to be covered, 301 

Superannuation benefit, 302 

Cost, 302 

Division of cost, 303 

Conditions upon which granted, 303 

Amount of benefit, 304-308 
Employees continued after adoption of system, benefits 

for past services, 308-318 

Contingencies to be covered, 308 

Superannuation benefit, 308-316 

Cost of benefit, 308 

Division of cost, 309 

Conditions upon which granted, 310 

Amount of benefit, 311-316 



Disability benefit, 


316 


Cost of benefit, 


316 


Conditions upon which granted, 


316 


Amount of benefit, 


3*7 


Employees continued after adoption 


of system, benefit 


for future services, 


318-322 


Contingencies to be covered, 


3i8 


Superannuation benefit, 


319 


Cost and distribution, 


3 X 9 


Conditions upon which granted, 


321 


Amount of benefit, 


321 


Withdrawal benefit, 


322 


Death benefit, 


322 



Summary, 322-324 

473 



INDEX 

PAGE 

Pritchett, Henry S., iio 
Reference to writings of, 27, 31, 32, 369, 462 
Quotations from, ix, x ii, 32, 298, 299, 300 

Opinion of, regarding thrift, 30 

Privileged Class, creation of, 32 

Problem of Devising a Retirement System, 

Analysis of, 38-66 

Prosser, C. A., 84 

Bibliography, 462 

Quotation from writings of, 75, 84, 223, 375 

Reorganization, 

Benefit in event of, 283-288 

Resignation, right to benefit in event of, 221-231 

In connection with disability benefit, 206 
See also Withdrawal. 

Risser, Rene, 

Summary from writings of, 335, 336 

Roth, Louis, 

Bibliography, 463 

Rubinow, I. M., 

Reference to writings of, 27, 332, 463 

Salary, amount of benefit in relation to, 

Superannuation benefit, 121-148 

Disability benefit, 190-197 
Death benefit, 246-250, 264, 265, 268 

Present employees, 304-306, 311-316 

Conclusions regarding superannuation benefit, 403-416 

Regarding disability benefit, 416-419 

Salary Scale, 

Analysis of problem, 44 _ 47 

In disability benefits, 194 

Nature of, 127 

Objections to use of, 128-137 

Savings Bank Plan or Savings and Annuity Plan, 

122, 140-148, 151-153 

Seager, Henry R., 

Reference to writings of, 24, 463 

Quotations from, 157, 228 

474 



INDEX 

PAGE 

Service Benefit. See Superannuation Benefit. 

Service, length of, in relation to superannuation bene- 
fit, 112-115, 148-155* 4io 
Relation to disability benefit, 187-190, 197-199 
In relation to death benefit, 250-252 

Sex, in relation to cost of benefits, 

Problem, 56 

Superannuation, 166-169 

Disability, 205, 206 

Sick Leave, 180-184 

Sies, Raymond W., 

Reference to report of, 5, 17, 76, 453 

Quotation from report of, 89-91 

Size of Service. See Small Services. 

Small Services, 

Method of operating systems for, on actuarial reserve 

basis 363-37 

Snedden, David, 

Quotation from, 78 

Studensky, Paul, 

Acknowledgement of indebtedness to, xiii 

Bibliography, 463 

Superannuation, 

Cost of, 5-9 

Superannuation or Service Benefit, 103-170 

Objects sought, 3-25, 103 

Conditions upon which granted, 104-120 

Amount of benefit in relation to amount of salary, 121-148 

Amount of benefit in relation to length of service, 148-158 
Amount of benefit in relation to economic and social needs 

of the employee, 155-162 

Cost of benefit, 162-170 

Sutton, William, 

Discussion of the salary scale, I 35" I 37 

Reference to writings of, l 7S 

Symmons, Frank Percy, 

Bibliography, 460 

475 



INDEX 

PAGE 

Temporary Disability, 180-184, 402 

Terminal Salary Plan, 

Objections to, 137 

Term of Office, fixed, 

Objections to, 1 1 

Thrift, Discouragement of, 29 

Thwing, Charles F., 

Bibliography, 463 

Transfers, development and use of, 116-118 

Trevelyan, Sir C. E., 

Testimony regarding maximum and minimum limitations, 124 

Universities, Federated, of England, 

Retirement Plan of, 368 

Valuations, actuarial, 

Necessity for, 353 

Nature of, 353-355 

How often necessary, 355 

Vanderlip, Frank A., 

Extract from writings of, 336, 337 

Bibliography, 463 

Voluntary Insurance, insufficiency of, 236-239 

Webb, Beatrice, 

Quotations from writings of, 30, 176 

Webb, Sidney, 30 

Quotations from writings of, 30, 176 

Welby, Sir R. E., 

Testimony of, regarding creation of fund, 329 

Widows' and Orphans' Fund, 

Objections to, 240-243, 247, 251-255, 422 

Willoughby, William F., 

Acknowledgement of indebtedness to, xiii 

Withdrawal, whether by resignation or dismissal, 216-232 
Extent of benefit advocated, 216 
Distinction between resignations and dismissals, argu- 
ments against, 217-221 

476 



INDEX 

PAGE 

Desirability of benefit, 221-231 

Amount of benefit, 231, 232 

Commutation of pension in event of, 376 

Women. See Sex. 

Workmen's Compensation Systems Distinguished From 

Retirement Systems, 171-172 



(1) 



